“Gold is the currency of kings, silver is the money of gentlemen, barter is the money of peasants, but debt is the money of slaves. - Norm Franz, Money and Wealth in the New Millennium, 2001
We are nearing the end of the debt-as-currency era.
This is quite a broad statement and, of course, since debt is the foremost currency of our day, it would be quite understandable if the reader were to regard such a prognostication to be utter nonsense.
Indeed, many would say that, without debt, the world couldn’t function. Debt has always existed and always will. However, in eras past, debt often played a much smaller role and those eras were marked by greater progress and productivity.
We’re now living in the era of the greatest level of debt mankind has ever created. In fact, we’ve come to regard it as “normal.” Most governments are far beyond broke. And they won’t be saved by confiscation or taxation, as their people and corporations are just as heavily in debt. For this reason, a collapse is inevitable and when it arrives, it will be a collapse that eclipses all previous collapses in its severity. (The severity of a collapse is invariably directly proportional to the severity of the debt.)
The present uncontrolled level of debt is made possible through the ability of central governments to create more currency at will. And this is only possible through the existence of a currency that is fiat in nature – that has no inherent value.
Aristotle was right on the mark when he stated that for something to be appropriate as money, it must have intrinsic value – independent of any other object and contained in the money itself.
The great majority of what passes for money today is digital, although, for daily use, paper currency is still widely used. But it must be said that paper currency is also fiat, having a far lower intrinsic value than the denomination printed on it.
In 1971, the US dollar went off the gold standard – it ceased to be redeemable in precious metal. From that date on, it existed as a promise only – a promise from a government. (Promises from governments tend to be somewhat less redeemable than promises from, say, loan sharks, or used-car salesmen.)
In time, the rest of the world followed and, today, no national currency is redeemable in anything that has intrinsic value.
Doug Casey has rightly called the dollar (since going off the gold standard) as an “I owe you nothing.” Exactly correct. He also describes the euro is a “Who owes you nothing?” since no one country in the EU is responsible to redeem the euro with anything that possesses intrinsic value.
It’s hoped by many today that cryptocurrencies will be the salvation of the soon-to-collapse monetary system. Unfortunately, cryptos can accurately be described as a “You have no idea who owes you nothing.”
Cryptos have distinct advantages over other fiat currencies – they allow quick transactions between parties anywhere in the world, independent of any reliance on banks or governments. Unfortunately, though, they have, in fact, even less inherent value than paper currency. Their inherent value is exactly zero.
This does not mean that they won’t become more popular, as people seek to extricate themselves from the control of banks and governments. However, cryptos only have a perceived value. Throughout history, whenever the perceived value of a form of fiat currency has collapsed, the currency has returned instantly to its intrinsic value.
An excellent example is the tulip mania of 1637, when the perceived value of some tulip bulbs became inflated to the degree that some were sold for ten times the annual income of a skilled craftsman.
Whilst we, today, might find this laughable, at the time, all, that mattered was that there was a general consensus that tulip bulbs would keep increasing in price. As a result, everyone jumped on the bandwagon… and inevitably, rode it over the cliff.
In every such case historically, whether it be tulip bulbs, the 1923 Reichsmark, the 2008 Zimbabwe dollar, or the more recent Venezuelan Bolívar, once the collapse comes, no one will subsequently touch a failed fiat currency with a bargepole.
What this boils down to is that we’re living in an era in which there are more forms of fiat currency in use than at any time in history and, more are being formed as we speak. So many cryptos are being created at present that we may soon begin to speak of “junk cryptos” as we once spoke of “junk bonds” to hopefully elevate the more reliable cryptos from their cousins. We may even come to speak of “investment grade cryptos.”
Returning to the subject of debt, the wise investor, when considering entering a debt relationship, should always ask himself, “Who issued the debt? What is it really worth? What is the likelihood that I’ll get paid?”
If the answer to these three questions is, “I have no idea,” it doesn’t mean that he shouldn’t become involved, but he should recognize that he has passed from speculator into gambler. Some gambles are worth the risk involved, but it’s a gamble, nonetheless.
Paper currencies have proven to be very risky indeed, particularly, as central banks have printed so recklessly in recent times and, should deflation occur (as seems likely) they’ve committed to printing as much as it takes to offset the deflation, endlessly devaluing the currency and very possibly leading to hyperinflation (again, as in Weimar Germany in 1923, Zimbabwe in 2008 and Venezuela in the present day.)
Similarly, Bitcoin, regardless of the fact that it’s always pictured as a gold coin, is actually an algorithm. It’s been promised to be “finite” – to be capped at 21 million. However, this is, once again a “promise.”
Tangible Versus Promissory Collateral
At present, we’re in the deepest trough of debt-as-currency that the world has ever seen. However, the writing is now on the wall that the end of this era is about to begin, and it may begin in the field of energy. Russia, one of the world’s foremost suppliers of energy, has agreed to sell energy to China, one of the world’s foremost purchasers of energy, to be paid not in US petro dollars, but in yuan, redeemable in gold. This is the first major step in a return to the world of tangible versus promissory collateral.
From that point forward, the trend will unquestionably expand to other forms of trade and, I would project, to currencies themselves.
But, assuming that the above is true, why should that mean the end of the debt-as –currency era? Surely, debt has always existed and will continue to exist. Quite so. However, in other eras, debt was commonly treated as dangerous and was avoided as much as possible.
The acceptance of a currency as real money only exists as long as confidence allows it to. Once that confidence has failed, it’s very difficult to sell anyone on the idea of accepting it again. (After the tulip mania collapse, no one trusted tulip bulb speculation anymore.)
National debt is fraud. It creates no wealth. Debt is the monetary equivalent of the emperor’s new clothes. The ruse is only maintained as long as people have faith in it.
Those who survive the coming collapse will be those who have created an economic insurance policy for themselves, in the form of tangible assets.
Reprinted with permission.