Our Money is About to Vanish

This chart shows how every extra dollar of government borrowing is actually reducing the GDP, the “financial economy” is strangling the “real economy".



Our Money is About to Vanish

The history of paper money is that it always at some point vanishes in a storm of hyper inflation and has to be replaced . The US dollar which has been the world’s trading currency since it was imposed on all economies by the armed might of the US after the 2nd World War is about to undergo its final flameout. The Canadian and other currencies will likely be taken with it.

How will this happen?

The background

The money lending ( and therefore money creation) activities of the world’s central banks, and the money borrowing of the financial world’s large hedge funds, mortgage issuers, commercial banks and financial “insurance’ entities have brought us to the edge of the precipice with now nowhere to go but over.

Money gets created and put into circulation whenever and wherever it is loaned by any bank. This money continues to circulate until it is extinguished by being paid back by the bank to the central bank from which it was drawn. And the commercial bank can't pay it back unless they first collect what they have lrnt out. If too much money is created, beyond that needed to handle normal business transactions of the “ real” economy, then, money becomes plentiful, it becomes worth less because it is seen as plentiful, and hence prices rise, and interest rates rise, as people seek to preserve the purchasing power of their savings, and of the goods they are holding to exchange for other goods they need to maintain their lives and business and other activities. this is called inflation. When I was young, in the '40s a good pair of skates cost about $2.50, now they are over 100 times as much. It’s obvious that banksters, and their supposed masters in government cannot restrain themselves from printing too much money, thus eroding its worth over time through steady inflation. In a hyper inflation, the price of those skates will rise to maybe $10,000 or more very quickly. Commerce shuts down. Business and household finances collapse. Savings and pension funds disappear. Civil chaos may well ensue, as it did in Germany in the 1920’s leading directly to the takeover by the Nazi regime of ill memory.

The mechanism

We have essentially two different economies to consider. Though they are intertwined, they are separate. One I designate as the “real economy”, the other, the “financial economy”.

The real economy maintains itself through the making and trading of goods and services with money as the medium of exchange. It involves primarily real activity and real production by the participants. The financial economy maintains itself by “renting” goods, and money in return for money, which is a form of gambling, betting that the borrower will pay back the loan plus interest, or by providing various forms of ‘”insurance”, which is another form of gambling .

To describe these and their interaction further let us consider a useful analogy. Imagine being at the horse races. What you see is a grandstand full of people, maybe 2000 or so, watching horse races in which 10 or so horses race in each race. Suppose the real economy here is the grandstands, the food and drink vendors, the horses and their owners and all the workers, jockeys, grooms, etc. including those who own build, and maintain the track. The financial economy is the activity of gambling by those in the stands watching. The race track owners rent the right to bettors to participate in the pools of money available. They ensure they won’t go broke by paying out less than they take in, which is also what car, house, and mortgage and other forms of insurance companies do.

Now imagine we expand the activity of gambling on the races to many thousands, even millions of participants, on the internet, or by other forms of communication. We might imagine the races taking a long time to complete, so there would be the question of which horse and jockeys would last, and for how long, and even some might change jockeys and so on. So in a $10, 000 prize race, with 10 horses, we have betting activity amounting to millions of dollars. Then, extend this further. Imagine some clever financial people start to offer insurance to the bettors, in case they lose too large a sum of money. Imagine also they begin to offer the opportunity to bet on the success of individual bettors, rather than just on the horse. And further suppose that all this “financial activity” is supported by central banks loaning huge sums to the participants. Loans to bettors, loans to those insuring the bettors, loans to those selling "packages” of bets. (Today, anyone who buys a house counting on its value to increase so they can use it for their pension fund, or as an ATM machine, is gambling. Recognise the scenario?) And so on.

This is exactly what the “financial economy” has become in our life time. It is now some 100’s of times larger in the amount of money in circulation within it, than the “real economy” on which it is supposedly based. When all those “financial” instruments, such as “mortgages” and other far more complex and unsaleable paper promises, begin to be perceived as not likely to be paid back, the “renters” will start trying to sell off their paper promises. Only the first few to do so will get out with any value. All the rest will be lost as the entire house of cards comes down. But, here is the rub. The money that was loaned into existence to enable all this “financial” activity will still exist. And it will be seeking a safe haven to preserve its purchasing power. The price of solid assets and of goods and services in the real economy will skyrocket. Hyperinflation will roam the land destroying savings, wealth, purchasing power, even survival for many.



Donato April 15 2010




This chart shows how spending money is already starting to flood out of the “financial economy”, in quantities far greater than needed to sustain the “real economy”.




A QUOTE FROM AN ONLINE SOURCE:

These days, the (US) Administration’s watered-down “Volcker rule” – which will likely be diluted to water-like reform legislation in Congress – excludes the government debt markets from proprietary trading restrictions. Government finance is today’s unfolding Bubble and, not surprisingly, this Bubble is off limits for regulatory reform. Government deficits are integral to the Bubble, and there will be no serious effort to rein them in. The Fed’s balance sheet is a serious Bubble issue, but it also remains untouchable. Treasury, GSEs, and Federal Reserve Credit are viewed as the solution, and a historic Bubble is emboldened and builds momentum.

The markets’ perception of “too big to fail” has for years been an integral facet of Bubble dynamics. And despite all the talk of trying to rid the marketplace of this notion, the markets remain more persuaded than ever: the unfolding global government finance Bubble is much too gigantic for policy makers to risk letting it come anywhere close to failing. Massive U.S. deficits and near-zero interest rates ensure a steady flow of finance (newly created as well as an ongoing exodus out of low-yielding instruments) to debt markets around the world. Confidence runs high that ultra-loose U.S. financial conditions will continue to underpin Credit expansions globally. Politicians may talk tough, and they do put on a good show. Meanwhile, markets function with reticent aplomb, knowing they’ve got policy makers right where they want them.