In Trinity of Truth, my last article, I showed how under our current system it is impossible to simply ‘print money’; rather (Fiat) currency must be borrowed into existence. This leads to the conclusion that it is impossible under our system to inflate away debt by printing; every new unit of currency printed must be balanced by a matching unit of new debt, else the books of the bank of issue (Central Bank) will not balance.
The CB indeed creates new currency out of ‘thin air’… but only against an offsetting asset. Normally, the asset is a treasury bond; the treasury borrows, and the CB prints against the treasury borrowing. This is called monetization when the CB does it; it is called check kiting if anyone else does it. Sovereign debt and currency supply grow hand in hand.
Some people suggest we change the system so government can simply print currency, without borrowing, without involving a CB. At first sight, this seems like a good idea; after all, why not eliminate the middle man, why create debt along with ‘desperately needed’ new currency? The answer is threefold, and as always involves The Whole Truth.
First, history clearly shows that printing without borrowing has been tried, over and over again, with inevitably disastrous results. Ancient China ran on a Silver standard. The Chinese government, the emperor, ran short of funds… like all governments everywhere… and the Chinese Emperor decided to issue paper ‘chits’ and decree that these chits were money, money as good as Silver. The Emperor had power to enforce this policy… at the point of a spear… and soon paper chits flooded China.
The chits started to depreciate as soon as they were issued. The holders of the chits, the people, were impoverished… and impoverishment led to bloody revolution and overthrow of the emperor’s dynasty. This scenario happened so often that the Chinese wrote laws outlawing paper currency. Nevertheless, Chinese dynasties continued to print ‘money’… without borrowing… and dynasties continued to collapse.
When Marco Polo completed his famous journey, he brought back Chinese gifts… among other things, paper money. Western kings and the Pope were so shocked by the idea of using paper as money, they decided this must be the work of the Devil… and burned the paper. Nevertheless, in a few hundred years, Western powers embraced paper… but in a different form.
In Middle Age Europe, unlike China, there was no emperor with the power to enforce paper money; too many small, scattered kingdoms, each with a broke and greedy king in charge. Power belonged to holders of money; today we call them banksters. European kings who needed more money had no choice but to borrow from the money lenders… and as always, there were strings attached. Above and beyond interest payments, European kings had to grant a monopoly to the banksters… a monopoly to create and issue paper currency. As the bankster says; “I care not who writes the laws of the land as long as I control the currency.”
We don’t have to go back to ancient China to see the history of printing without borrowing. We can see the results in John Law’s work for Louis XIV; the French king was bankrupt, along with the French economy. Law persuaded the king to print ‘money’ in the form of paper Assignats, ‘backed’ by the value of confiscated church lands. The printing soon led to John Law running out of Paris disguised as a woman, and to the French revolution. Napoleon Bonaparte’s first act as Emperor was to restore Gold money to France. For a while, Bonaparte was considered a hero… at least in France.
Another example of money creation without borrowing played out in the early twentieth century. Post WWI Germany was hamstrung economically by the Treaty of Versailles; and squeezed mercilessly by reparation payments. Reparation payments had to be made in terms of Real Money… Gold. The banksters were willing to lend Fiat currency to Germany… but only on onerous terms. Hitler chose not to borrow, but to print without borrowing. He chose the Chinese way. Indeed, at first his policy was wonderfully effective; the shortage of cash and credit were relieved, and Germany experienced a wondrous economic recovery. For a while, Hitler was considered a hero… at least in Germany.
Mind you, the banksters were not pleased. Indeed, the international banksters… Rothschild et al… declared war on Germany on March 24, 1933. See the New York Times, March 24, 1933 issue. Military action began later, but this was the bankster declaration of war; dare to defy the banksters… and you pay the price. This scenario is still in play today. Any nation or leader who dares to defy the Petro Dollar is invaded… this is called regime change.
We have two large countries defying the banksters; China and Russia. China has a lot of debt… but it uses the borrowed funds wisely, to build real economic strength, in manufacturing and infrastructure. Chinese debt is primarily US treasuries; the debt is being reduced rapidly… and in the meantime serves as a means of keeping Uncle Sam out of Chinese affairs. If Uncle pushes too hard, the Chinese have the choice to liquidate their US Tbonds and thus destroy the USD suddenly instead of letting it self-destruct gradually. China is also buying Gold at both the CB and the citizen levels; in China, fraudulent banksters are executed. In China, power rules money.
Russians have little or no international debt; they are also buying Gold steadily. Washington is desperate to achieve regime change in Russia; but with the popularity and smarts of the current Russian boss, Mr. Putin, Washington’s plans do not seem likely to succeed. Washington is simply pushing Russia and China into closer collaboration… along with the Brics nations. Washington is self-destructing along with the Dollar.
History does not show promise in the idea of printing without borrowing. We see what happened, but it’s nice to understand why and how printing fails. Many people claim that this is simply ‘Human Nature’… that power corrupts, that absolute power corrupts absolutely, that greed rules, and so on. Out of control printing is simply part of Human nature. While it is true that murderous greed is endemic to at least some humans; we call these people psychopaths… it is important to understand the mechanism as well as the motive. We need to grasp the whole truth.
Second, real money is never just a promise… this is the bottom line in the failure of Fiat. All Fiat currency, whether borrowed or printed into existence, is but a promise. Real money, Gold and Silver, carry their own value. Gold and Silver are valuable in themselves; dug out of the Earth with much sweat and at high cost… cherished, worn as bodily adornment… unlike paper with a bit of ink sprinkled on it. Not much demand for paper jewelry, is there?
In the early days of paper currency, bank notes… like Dollar bills… were redeemable for money; a known quantity and fineness of Silver. Dollar bills printed early in the twentieth century carried the promise to redeem; the bank note entitled bearer to a defined quantity of Silver from the Treasury vault, depending on the denomination of the note. Silver is the constitutional money of the USA.
Today, any Dollar promise is imaginal; no promise is printed on the bill. The implicit promise of the Dollar has something to do with the ‘full faith and credit’ of the US government… a nebulous statement at best. Any ‘faith and credit’ is fading rapidly. When the illusion of ‘faith and credit’ is gone, also gone is any value attached to the slips of paper. By contrast, real money coined by Romans two thousand years ago still carries full value.
Along with ‘print money to inflate away the debt’ comes the other cliché defining inflation as ‘more money chasing fewer goods’. How silly; neither real money nor paper bank notes do any chasing. Only living creatures indulge in chasing. People may use money to chase (purchase) goods… or not. They may hoard or invest, rather than ‘chasing’ goods.
In more precise terms, the quantity theory of money is false; or at best, incomplete. Austrian economics recognizes the concept of declining utility. The more of something we get, the less we value it… and at some point, a margin is reached… where we do not want any more.
As we drive along in our car, and the gas gage moves ever lower, the need for a refill moves to the top of our value list. Once we fill our gas tank, more gasoline has no value for us; its utility is now zero. In the same way, if we are hungry and getting hungrier, finding something to eat moves to the top of our value scale; we look for a restaurant, and buy a meal. Once we have eaten our fill the utility of any further food drops to zero.
A man dying of thirst in the Sahara has water at the very top of his value list… but after a few liters, he cannot drink any more. Water that was of life and death importance has dropped off his value scale, at least for a time. Notice, however, that whatever may be at the top of our value list, we use money to trade for what we want; gas, food, or water, whatever. Money is always at the top of our value list, as we use it to acquire the item we currently want the most.
The marginal utility of money does not decline! No matter how much we have, we can always use more. This implies an infinite demand for money, quite unlike for any other commodity. By corollary, if there is an infinite demand for something, its quantity has no bearing on its value.
Third, we see a bit of simple math; as simple as two plus two is four… not ‘higher math’, partial differential equations, or any other form of obfuscation emanated by CB’s to hide their true intent. Consider a country’s GDP…. GDP is the sum of all monetary transactions in a given sovereignty; all goods and services bought and paid for in one year add up to GDP. (borrowing is excluded, only fully paid transactions count).
Let’s assume the US GDP is sixteen trillion Dollars (World Bank data says about 17 trillion, but we keep the numbers simple) and the money supply is four trillion (Dollar bills and bank deposits). Four trillion Dollars yield sixteen trillion GDP… how is this accomplished? By each Dollar changing hands four times a year. Four times four trillion is sixteen trillion.
But notice that two times eight is also sixteen. If the money supply were two trillion, the very same GDP would be reached by the money changing hands eight times a year instead of four times. Or, if money supply is eight trillion, sixteen trillion GDP is the result of money changing hands twice a year.
The quantity of money is only and exactly half the answer to GDP; the second half, rarely talked about and certainly not on mainstream media, is the velocity… how quickly people spend their money. Whether they use their money to ‘chase goods’… or hoard or invest instead of chasing. Seems like ‘fine tuning’ the money supply is a silly waste of time… indeed, it is a lie, designed to cover up the truth. CB’s have some direct control over money supply… but not over velocity.
If paper is seen to be worth more over time (called deflation) people are motivated to hold the stuff and wait till it is even more valuable… leading to lower velocity and ever more deflation. Ever less velocity is the road to depression. On the other hand if paper is seen to be worth less over time (called inflation) people are motivated to spend the stuff before it loses even more value… leading to higher velocity and ever more inflation. Ever more velocity is the road to hyperinflation. No system based on positive feedback can long survive.
We come to the key point; if the quantity of money is not the whole truth, then what is? The whole truth is that it’s the quality of money that counts. Gold and Silver have quality that cannot be denied or destroyed. Paper has only an illusion of value. When the Emperor’s spear falters, so does the illusory value of his chits. The Petro Dollar is faltering. The Empire of Chaos is faltering. Change your Fiat paper promises for some real money before it’s too late.
First published here: http://goldsilverworlds.com/money-currency/printing-money-without-borrowing/