Why is Money worth anything...

[tsafa 2]

The Federal Debt is 14.5 Trillion… there are only about 900 billion US dollars in circulation. So the total national debt is about 14 times more then the total US dollars that exist. This shows how silly the idea of paying back the national debt is.

 

I am sure at some point when we were in grammar school we all asked the question “why is money worth anything”. The reason it is worth anything, is because as a society… We owe more more money then exists. The Monetary system was designed to work that way.

 

I wrote the following article and I want to share it with everyone because I think it is important to understand how the system works before we try to change it.

 

Lets consider the two ways that fiat currency obtains value. One way is that the government sets its value and forces you to accept it. The other way…. is that an artificial “need” is created. Lets use cow-manure (sh1t) as an example and see how it can be transformed into something precious and highly coveted.

 

1-You need to fertilize a field and need 50 lbs of manure.

 

2-Your cow can only produce 1 lbs a day, so you go to your neighbor and borrow 50 lbs of cow-manure.

 

3-Your neighbor gives you the 50 lbs of cow-sh1t but tells you that you must pay him back with 100 lbs at the end of the month (interest).

 

4-Your cow has only produced only 30 lbs of manure by the end of the month. You need an additional 70 lbs to pay back your debt.

 

5- You go back to your neighbor and ask to borrow another 70 lbs of manure .

 

6-You pay your neighbor back with the 30 lbs of cow-sh1t you actually have, plus the additional 70 lbs he lent you.

 

7-You have paid back the debt of 100 lbs of cow-sh1t owed… but you had to borrow an additional 70 lbs of cow-sh1t to do it.

 

8- For the 70 lbs of manure you borrowed from your neighbor, you must now pay back 140 lbs next month.

 

9- Your cow still only produces 30 lbs per month, so you will have to borrow 110 lbs of manure at the end of next month to pay back your debt.

 

10-You will never have enough manure to pay back all your debt. Cow-sh1t is now the most valuable thing in your life and you can never have enough of it. You will spend the rest of your life working for sh1t.

 

I just created a virtual monetary system based on Cow-sh1t. Not really… This system is really based on debt and you can substitute anything in the place of manure including gold or paper. The key to making this system work, is to set a rate of interest that exceeds that which can actually be paid back. Hence you put the debtor on a “rat wheel” where they are running forever and never actually catch up (pay their debt). Now lets take this example further and say we attach the rat-wheel to a “mill” so that the running actually produces something of value like flour for bread. You now have “productivity”. The goal of this system was never really to collect the debt. The goal of the system is to keep people working to pay off something that can never be paid off. Keeping the rat-wheel turning is “Productivity” and that is the end goal.

 

It is of no relevance if you use gold, cow-sh1t, or paper as your currency. The part that makes it work is debt. You always owe more then you have due to compounding interest. With individuals and corporations there is a limit to how much they can borrow because they must put up real assets as collateral. That is not the case with the Federal Government. The Federal Government can borrow and keep borrowing without limit except for a debt ceiling limitation or a balanced budget amendment. There is no possible way for the Federal Government to ever pay back the debt to the privately owned Federal Reserve Bank, even if they raised taxes and cut all expenses, because the compounding interest on 14.5 trillion already owed is such a ridiculously high number. Once Debt is created, at no point in time is there ever enough currency in existence to pay off all principal and accumulated interest one it. Paying off all the debt is a mathematical impossibility because the money does not and can not exist.

 

 

 

The only way to fix this problem is the to change the computation for interest. Interest is what keeps the debt growing.

 

Instead of Int= debt x rate x term. They need to change it so that Int= (debt x rate x term) – Deflation Variable.

 

This would start to decrease the debt at a faster rate, but there is still a problem… as soon as the free market realizes that their is now more available money in circulation, due to decreased debt obligations, business will respond by raising prices to acquire some of that money. The system has a built in fix. If new borrowers do not come in to borrow more money because borrowing money is too expensive (high interest rates), individuals and corporations will find themselves near default. Some will have to go out of business in order for others to survive. This is the painful truth that no one is willing to come to terms with.

 

In order to fix the system, you have accept deflation, recession, defaults and bankruptcies as part of the system. This is the fail-safe that was designed into the system to prevent inflation. The Deflation Variable I suggested above may ease the level of default. This Deflation Variable would work along with a prolonged recession to bring debt back under control. No amount of tax increase or cost cutting can fix the problem because that is not how the system was designed to work. The system was designed to trap debtors into a life time of paying off an ever growing debt. The Federal Government has fallen into their own trap.

 

A lot of people say that going back to a Gold Standard would fix things. It is important to understand that there have been problems with gold and silver backed currencies going back to ancient times. For one thing, the people/companies who mine gold and silver are able to manipulate the supply. Furthermore, government is able to manipulate the companies that mine silver and gold.

 

Here is how the Gold Standard took shape in America.

 

In order for the Federal Government to go on the Gold Standard in 1933, executive order 6102 was issued by President Franklin Roosevelt. The order criminalized the possession of monetary gold by any individual, partnership or corporation. There is nothing in the constitution that allows for such an order and it was challenged in court. Its enforceability was always in question but many Americans blindly submitted. The privately owned Federal Reserve Bank paid $20.67 per ounce for the gold they received. Later the exchange rate was set at $35 per ounce for international transactions where it stayed until 1971.

 

None of what I just said should make anybody feel comfortable. What I just described is not capitalism in any way, shape or form. There is no free market at work here. There never was in relation to the gold standard. When government regulates the prices of anything, including gold, you now have a centralized (communist style) economy.

 

It was always doubted that the US government ever maintained the ratio of dollars to gold that it said it would maintain. This became obvious by 1971 when the French started demanding payment in gold for their dollar reserves and President Nixon decided to end the phoney gold standard that never really existed. Since it was illegal for American Citizens to own gold, trading in their dollars for gold was out of the question. The Gold Standard was an illusion.

 

Gold can not be converted into units of labor, food, energy or building materials. Any society that has ever used a precious metal standard has had currency problems, including Rome. There was a huge monetary crisis in Europe from 1750 to 1850 concerning money backed by precious metals. In a time of real crises when barbarians are at your front gate, the only thing of value is fortifications, weapons, armor, manpower, food, water. Gold and Silver mean nothing.

 

 

http://libertythinkers.com/education/gold-standard-myths-and-facts-part-2/#comment-1118

[Malsua 1,422]

Fiat dollars are debt instruments.

 

Gold is not.

 

The fractional banking system is what allows everyone to have more debt instruments. Essentially, money can be conjured wherever someone is willing to take it.

 

But, to explain that the debt can never be paid off you need to change your analogy a little.

 

Realize that money was first generated by the Federal Reserve which is about as federal as Federal express. Anyway, the first dollar they loaned out needed to be repaid with interest. There is no way to pay back the interest without loaning more dollars out. So, yes it's a debt treadmill but inflation expands the money supply allowing more people to have money.

 

In pure economic terms, the great depression was only worse than now because NO ONE had any dollars in their pockets. Deflation means more people chasing fewer dollars. This makes the dollars more valuable...if you can get any. Deflating the economy in the method you described would end badly.

 

What simply will happen is that everyone will get a haircut. There will be higher taxes and benefit cuts as well as job losses for public sector employees. This is if the fed doesn't hyperinflate us. If Hyperinflation occurs, it's over Johnny.

[tsafa 2]

Fiat dollars are debt instruments.

 

Gold is not.

 

The fractional banking system is what allows everyone to have more debt instruments. Essentially, money can be conjured wherever someone is willing to take it.

 

But, to explain that the debt can never be paid off you need to change your analogy a little.

 

Realize that money was first generated by the Federal Reserve which is about as federal as Federal express. Anyway, the first dollar they loaned out needed to be repaid with interest. There is no way to pay back the interest without loaning more dollars out. So, yes it's a debt treadmill but inflation expands the money supply allowing more people to have money.

 

In pure economic terms, the great depression was only worse than now because NO ONE had any dollars in their pockets. Deflation means more people chasing fewer dollars. This makes the dollars more valuable...if you can get any. Deflating the economy in the method you described would end badly.

 

What simply will happen is that everyone will get a haircut. There will be higher taxes and benefit cuts as well as job losses for public sector employees. This is if the fed doesn't hyperinflate us. If Hyperinflation occurs, it's over Johnny.

 

The analogy is meant to make it clear that the amount of debt always exceeds the money supply, so it is impossible to ever be debt free. The debt is also the mechanism that gives money value because you always need more of it to pay debt. The system is a good one. It is ingenious. The problem is that the Government now has a disproportionate amount of debt relative to everyone else. If you have 100 people chasing each other in a circle it does not feel like you are going in a circle because you only get to know the few people in front of you and the few people behind you. The Government Debt is now so large that they are chasing themselves in a circle and the system looks obvious and silly. No reasonable cost cutting or taxes will pay down the debt and allow the government to function at the same. The government ruined a very good system by abusing it.

[Dan 177]

Nice writeup.

 

The system was not designed to run forever, they knew it would eventually reach a critical point such as a debt explosion where exponential borrowing is needed to pay the interest and keep feeding the machine at the same time. They never want deflation, as that's the stuff that puts banks and companies out of business. Inflation makes it easier to repay long term debt and keep the wheels turning. Deflation makes it all grind to a halt as people simply stop paying old debt back and default b/c the money has become too valuable to let go for that purpose. Then there is stagflation, which is very resistant to monetary policy tinkering, arguably this is what we are dealing with today.

 

 

There is ultimately one solution when it gets to the end... a massive restructuring/resetting of the currency model. It would result in a massive re-valuation of currency via an exchange model , i.e. 200 Hyperinflationed USD's now = 1$ of the new currency. Everyone will be chasing the new currency because you cant use USD's to buy anything any longer (by law), hence making the new currency have tremendous value, and thus the cycle begins again. Everyone's pre-revaluation wealth will have dropped by a tremendous amount like 50%. This is part of the plan to drive acceptance for the new currency, as people will need it for food, clothes, shelter, etc.

[gunnyr 17]

The free market is not about debt, it is about value. In a free market transaction, both the producer and the consumer are better off for having expended something. The producer their labor, the consumer their money. Regarding debt between two private parties it is understood that the issuer (creditor) expects future labor or repayment from the debtor. Each understands their end of the agreement and volunteers to abide by it.

 

The current monetary system exists for the purposes of keeping central banks in power and allowing unlimited government spending. The gold standard kept government spending honest as it couldn't do anything unless it had the money first. The Byzantine empire lasted for a thousand years with gold as their monetary standard. It collapsed when it devalued their currency to fund wars against the Ottoman empire. Prior to that it had funded its wars based on what it had in the treasury.

 

When it comes to government debt, what is less understood is that their spending is backed by our (and our children, grandchildren, etc) future labor. Government isn't spending money, it hasn't got any. It is spending the promissory notes of our future earnings. This is what we call the dollar. The reason there is more money in circulation isn't because there is more debt, it's because the Fed printed more. How else can you justify a tripling of the adjusted monetary base overnight like they did in September of 2008? Was there a 300% increase of debt in such a short amount of time? No, there was not. Inflation (and the ensuing hike in interest rates) is caused by an increase in the money supply. Period. This will become painfully clear once that new money hits general circulation instead of being parked as excess reserves in bank holdings.

 

Economically speaking, how can an entity like the government have anything of value? It produces nothing, owns nothing, sells nothing. Yet it holds tremendous power because of ordinary people like yourself. Do you understand why?

 

(Answer below)