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GÖTTERDÄMMERUNG
The Twilight of Irredeemable Debt
Antal E. Fekete
Gold Standard University
Wagner’s opera Götterdämmerung is about the twighlight of pagan gods. The most powerful of the latter-day pagan gods that has been guiding the destinies of humanity for the past two-score of years is Irredeemable Debt. Before August 14, 1971, debts were obligations, and the word “bond” was to mean literally what it said: the opposite of freedom. The privilege of issuing debt had a countervailing responsibility: that of repayment.
On that fateful day all that was changed by a stroke of the pen. President Nixon embraced the woolly theory of Milton Friedman and declared the irredeemable dollar a Monad, that is, a thing that exists in and of itself. According to this theory the government has the power to create irredeemable debt ― debt that never needs to be repaid yet will not lose its value ― subject only to a quantity rule”, e.g., it must not be increased by more than 3 percent annually. This idea is so preposterously silly that “only very learned men could have thought of it”. If the thief is thieving modestly, then he will not be detected. It never occurred to the professors of economics and financial journalists that a modest thief is an oxymoron, a contradiction in terms. How did they get to believing in irredeemable debt? The explanation is most likely found in Schiller’s dictum: “Anyone taken as an individual is tolerably sensible and reasonable. But taken as a member of a crowd ― he at once becomes a blockhead”. Economics professors and financial journalists are no exception.
For a time it appeared that Milton Friedman was right. The world has become dedicated to the proposition that it is possible, even desirable, to expand irredeemable debt in order to make the economy prosper. Never mind the default of the U.S. government on its bonded debt held by foreigners. Never mind people victimized by theft. Thanks to the quantity rule, they will never notice the difference.
For all its seductive attractiveness Friedmanite economics is ignoring the effect of irredeemable debt on productivity. It watches debt per GDP and is happy as long as this ratio stays below 100 percent by a fair amount. However, what should be watched is the ratio of additional debt to additional GDP. By that indicator the patient’s condition could be diagnosed as that of pernicious anemia. It set in immediately after the dollar debt in the world was converted into irredeemable debt. The increase in GDP brought about by the addition of $1 of new debt to the economy is called the marginal productivity of debt. That ratio is the only one that matters in judging the quality of debt. After all, the purpose of contracting debt is to increase productivity. If debt volume rises faster than national income, there is big trouble brewing, but only the marginal productivity of debt is capable of revealing it.
Before 1971 the introduction of $1 new debt used to increase the GDP by as much as $3 or more. Since 1971 this ratio started its precipitous decline that has continued to this day without interruption. It went negative in 2006, forecasting the financial crisis that broke a year later. The reason for the decline is that irredeemable debt causes capital destruction. It adds nothing to the per capita quota of capital invested in aid of production. Indeed, it may take away from it. As it displaces real capital which represents the deployment of more and better tools, productivity declines. The laws of physics, unlike human beings, cannot be conned. Irredeemable debt may only create make-belief capital.
By confusing capital and credit, Friedmanite economics obliterates truth. It makes the cost of
running the merry-go-round of debt-breeding disappear. It makes capital destruction invisible. The stock of accumulated capital supporting world production, large as it may be, is not inexhaustible. When it is exhausted, the music stops and the merry-go-round comes to a screechy halt. It does not happen everywhere all at the same time, but it will happen everywhere sooner or later. When it does, Swissair falls out of the sky, Enron goes belly-up, and Bear-Sterns caves in.
The marginal productivity of debt is an unimaginative taskmaster. It insists that new debt be justified by a minimum increase in the GDP. Otherwise capital destruction follows ― a most vicious process. At first, there are no signs of trouble. If anything the picture looks rosier than ever. But the seeds of destruction inevitably, if invisibly, have sprouted and will at one point paralyze further growth and production. To deny this is tantamount to denying the most fundamental law of the universe: the Law of Conservation of Energy and Matter.
The captains of the banking system in effect deny and defy that basic law. They are leading a blind crowd of mesmerized people to the brink where momentum may sweep most of them into the abyss to their financial destruction. Yet not one university in the world has issued a warning, and not one court of justice allowed indictments to be heard from individuals and institutions charging that the issuance of irredeemable debt is a crude form of fraud, calling for the punishment of the swindlers issuing it, whether they are in the Treasury or in the central bank. The behavior of universities and courts in this regard could not be more reprehensible. Rather than acting to protect the weak, they act to cover up plundering by the mighty.
The inconspicuous beginnings of irredeemable debt have blossomed into a colossal edifice, a
fantastic debt tower that is bound to topple upon the prevailing complacency and apathy. Actually ‘tower’ is a misnomer. Rather, what we have is an inverted pyramid, a vast and expanding superstructure precariously balanced on a tiny and ever-shrinking gold foundation ― <Singularity?>the only asset in existence with power to reduce gross debt. The construction has no precedent in history, and no place in theory, whether Ricardian, Walrasian, Marxian, Keynesian or Austrian. As a matter of fact, no one is analyzing the process. Research has been placed under taboo by the powers that be, lest diagnosis reveal the presence of cancer caused by irredeemability. There is no known pattern or model that would apply to its mechanism in terms of equilibrium analysis. Two negative conclusions emerge. One is that the edifice of irredeemable debt must grow at an accelerating pace ,<resonance?>as markets for derivatives providing ‘insurance’ to holders of debt proliferate. The insurer of debt must also be insured, as must the insurer of the insurers, and so on, ad infinitum. This is due to the fact that the risk of collapsing bond values has been created by man. In contrast, the risk of price changes of agricultural commodities are created by nature, and the futures market provide insurance, with no need to re-insure. The other conclusion is that the unwieldy size of the debt structure excludes the possibility of a normal correction: a major liquidation would dwarf the calamities of the Great Depression.<.......event horizon?>
It is a delusion to think that the government can splatter debt all over the economic landscape to cover up its warts, and reap everlasting prosperity as a result. The stimulation and leverage of debt has always caused stock markets to boom, so that the impact of debt was aided and magnified by the added paper wealth which, in turn, increased the propensity to spend and borrow still more. Businessmen are supposed to be more realistic in contracting debt. Yet the pattern of increase in corporate debt has also changed tremendously. Whereas traditionally corporations used to finance their capital needs in a ratio of $3 in debt for every $1 in stock, in the years leading up to 1971 they issued $20 in debt for every $1 in stock, with the ratio sky-rocketing thereafter.
We hear arguments that economists have by now learned how to control the economy with the so-called built-in stabilizers. Debt has largely lost its sting as a consequence, we are told. For example, bank deposits can now be insured. They couldn’t in the 1930’s. But when the government itself is loaded with debt, and runs boom-time deficits, the built-in stabilizers may backfire and destabilize the economy further. The government has commitments so great that its endeavor to offset a depression in our vast economy can only result in a loss of confidence. Anxious withholding of purchasing power in the private sector could far outweigh anything the government can add. To make matters worse, government income is highly dependent on a prosperous economy. The magnitude of the problem of offsetting a depression is grossly disproportionate to resources available.
One of the marks of great delusions is that nearly everyone tends to share them. It is a sorry
tale ― any delusion gives rise to a rude awakening in due course. Public attitudes to debt have
changed so radically since 1971 that today indebtedness is practically a status symbol, instead of a shameful condition it used to be in a by-gone era. The most striking reversal in traditional American attitudes towards debt is the widespread acceptance of perpetual national indebtedness, copied by perpetual personal indebtedness ― a never-ending lien on future income.
Perhaps the worst aspect of the regime of irredeemable debt is the lowest level of morals followed by governments in modern history. It is epitomized by an elaborate check-kiting conspiracy between the U.S: Treasury and the Federal Reserve. Treasury bonds, contrary to appearances, are no more redeemable than Federal Reserve notes. It’s all very neat: the notes are backed by the bonds, and the bonds are redeemable by the notes. Therefore each is valued in terms of itself, rather than by an independent outside asset. Each is an irredeemable liability of the U.S: government. The whole scheme boils down to a farce. It is check-kiting at the highest level. At maturity the bonds are replaced by another with a more distant maturity date, or they are ostensibly paid in the form of irredeemable currency. The issuer of either type of debt is usurping a privilege without accepting the countervailing duty. They issue obligations without taking any further responsibility for their fate or for the effect they have on the economy. Moreover, a double standard of justice is involved. Check-kiting is a crime under the Criminal Code. That is, provided that it is perpetrated by private individuals. Practiced at the highest level, check-kiting is the corner-stone of the monetary system.
But our world is still one of crime and punishment, tolerating no double standard. The twilight of irredeemable debt is upon us. The sign is that banks are reluctant to take the promissory notes of one another. Significantly, this also includes overnight drafts. The banks know there is bad debt at large, and they don’t want to be victimized by taking in some inadvertently. What the banks don’t yet know, but will soon learn, is that all irredeemable debt is bad debt, and there is no way to rid the system of poison through administering more.
Redeemability of debt is not a superfluous embellishment. It has a function of fundamental importance: the proper allocation of resources to the different channels of their utilization. The obligation to redeem debt hangs as the sword of Damocles over the government, just as it does over the head of every economic participant. It compels economy and foresight. It forces balancing of income and expenditures. It adjusts claims and commitments. It limits expansion by shifting resources away from the incompetent, and away from unhealthy projects. The regime of irredeemable debt creates an escape route from commitments by the promise of eliminating the pressure of solvency. Whether it promises eternal prosperity, or it promises eternal subsidies, it does not matter. The results are the same. They consist in misleading people, enticing them to skate on thin ice, and luring them into financial adventures, private or public, which are not warranted by the ability to pay. The logical consequence is wholesale bankruptcy of individuals as well as that of the political setup. Losses breed more losses, until they become an avalanche. The present crisis is just the first sign of that denouement. More is on the way.
It is still possible to escape the catastrophe which this process would entail. The way out is to open the U.S. Mint to gold and silver, as advocated by presidential candidate Dr. Ron Paul. The logic of this remedy is that it would mobilize potentially unlimited resources, presently tied up in idled gold, and re-introduce the indispensable means of debt-retirement into the economy.
Failing to bring gold back, where are we heading? The short answer is: we are marching into the death-valley of collectivism. The alternative to re-introducing redeemable currency is that the debt behemoth will force the imposition of a capital-levy type of taxation ― à la Solon, 594 B.C.
April 27, 2008.
gnosticheresy_2 wrote:Without doubt one of the best most thought provoking articles I've ever seen posted here (imo of course). Thank you for that
" The study of money, above all other fields in economics, is one in which complexity is used to disguise truth or to evade truth, not to reveal it. - John Kenneth Galbraith
It is well enough that people of the nation do not understand our banking and monetary system, for if they did, I believe there would be a revolution before tomorrow morning.--Henry Ford
THERE IS MORE
WHERE THIS GIFT HAS COME FROM
Antal E. Fekete
Professor of Money and Banking
San Francisco School of Economics
E-mail: aefekete@hotmail.com
On Wednesday, March 18, another handsome gift was delivered by the Fed to the bond bulls.
It was the announcement that the Open Market Committee has made a unanimous decision for
the central bank to buy $300 billion in long-term Treasury bonds and notes over the next sixmonth
period. The yield on the 30-year Treasury bond immediately fell from 3.8% to 3.5%,
while the yield on the benchmark 10-year Treasury note fell more: from 3% to 2.53%,
increasing the price of the note by 42/32 from 9726/32 to 10128/32 , the biggest one-day rise in
years. The gift of risk-free profits is granted to the bond bulls through courtesy of the Fed, in
telling them in advance about its intention of buying long-dated government debt.
Note that in the past Fed purchases of long-term Treasurys have been exceedingly
rare. The last time the Fed resorted to it was in 1959. But half-a-century ago it was not meant
to be a permanent fixture of monetary policy. This time is different. Wednesday’s
announcement is the opening salvo in a brand new game of serial interest-rate cuts in the
high-end of the yield-curve now that the Fed has chewed up the low end. It has used up all its
ammunition in the short-term T-bill market where the rate is only microscopically greater than
zero, rendering the Fed helpless and impotent. A new bag of tricks is coming into play: the
monetization of long-term government debt. The market tells it all. The dollar index fell 3%,
the biggest drop in more than two decades.
Actually, as I have suggested in several earlier articles, ‘serial cutting of interest rates’
is a misnomer. The correct phrase is ‘serial halving of interest rates’. The nuance is important.
Serial cutting comes to an end when you have cut it to the bare bones: all the way back to
zero. Not so serial halving that can be fine-tuned like water-torture. It can continue
indefinitely, while each halving causes the same devastation in the economic landscape as it
doubles the liquidation value of total debt.
Central banks in Japan and the United Kingdom have announced similar monetary
policies. The Bank of Japan has said that it will increase its volume of bond purchases by
30%. According to Mr. Shiraskawa, the governor of the bank, “bond purchases are not
intended to finance the Japanese government’s spending. That would be too dangerous.” Who
is the governor kidding? As long as the Japanese government spends more than its revenue
from taxes, every act of buying a government bond is an act of financing the government.
Even in Switzerland, the paragon of monetary and fiscal rectitude, where the Swiss National
Bank is hard put to find a government bond it can buy, they have to do something to enter the
mad race to find out which country can increase the money supply at the fastest rate. The
Swiss are resourceful: since they cannot increase the money supply through purchases of
bonds, they will increase it through sales of Swiss francs. All masks are off. The Swiss will
not let others outbid them in the game of bidding down the value of national currencies
around the globe. This is competitive currency debasement at its most vicious. It is a cover-up
for the underlying trade war.
* * *
Why should we worry about a monetary policy that depends on risk-free profits offered to
speculators betting on higher bond values? Because it reflects the utter corruption of the
profit-and-loss system on which capitalist production is based. It makes the businessman
appear foolish who takes risks in the producing sector while trying to satisfy the needs of the
consumers – when risk-free profits are available in the financial sector. As a matter of fact,
the risk-free profits of the bond bulls do not come out of nowhere. They come right out of the
capital accounts of the producers. These gains are the flipside of the capital losses suffered by
the real risk-takers, the sitting ducks in this shoot-out.
I have been in a minority of one in my quest to inform the public about the single
cause of the present economic disaster. In fact I have been predicting it for the past eight
years. The single cause is the Fed’s deliberate policy to drive down interest rates through
serial halving. This policy is animated by the economic theories of John Maynard Keynes,
according to which interest ought to be abolished so that the stone can be turned into bread
and water into wine. The miracle is worked by a central bank well-equipped with printing
presses and a factory to produce green cheese in unlimited quantities, to shove it down the
throats of savers who are trying to provide for their twilight years, or for the education of their
offspring, or just for a rainy day.
Continuing or even accelerating that disastrous monetary policy of unlimited green
cheese production will not alleviate the crisis. It will make it worse. Much worse.
Look at it this way. The present contraction of the world economy is not due to a glut
in global savings for which businessmen can find no good use, and which consequently has to
be mopped up through expanding the balance sheet of the central banks all over the world, as
“explained” by Paul Krugman and his friend, mentor, and former boss Ben Bernanke. The
contraction is due to the lethargy of businessmen who see their past investments turn sour one
after another at each interest-rate cut. Businessmen will not make new investments, no matter
how badly central bankers want to force-feed them at the trough of newly created money, as
long as the mad driving-down of interest rates continues. Would you buy a car today if you
were told that its price will be cut tomorrow? Of course you wouldn’t. Well, it is the same
with businessmen. They would not make an investment today if they were told that tomorrow
they could finance it at a cheaper rate and, the day after tomorrow at a rate cheaper still. It is
as simple as that.
Now the Fed is saying that it has got a new toy-grenade to try on the economy: the Tbond
purchase plan. Businessmen conclude that this is time to go into hibernation-mode. They
just want to survive with their remaining capital intact until this madness runs its full course.
They will come back and start investing again in saner times, when interest rates are stabilized
at their natural level. Those who listen to the siren song from the Fed and other central banks,
and invest at today’s teaser-rate will get massacred at the next halving, when even lower
teaser rates will be offered.
* * *
What we are witnessing is the closing of Keynes’ system. This system is based on the worst
fallacy ever embraced by pretenders and impostors in science: the fallacy, inspired by Karl
Marx, of over-saving and under-consumption. It was under this banner that the Fed introduced
its illegal policy of open market purchases of government bonds that would be legalized
retroactively later. But with this coup d’etat the Fed shot itself in the foot. It has forgotten to
take the reaction of bond speculators into account. Of course, speculators would not sit idly by
when they are told that, as a matter of high monetary policy, the Fed will have to make
periodic trips to the bond market to purchase its quota of government bonds. Of course
speculators would want to pre-empt the Fed. Of course they wanted to buy first so that they
could dump their bonds on the Fed at a profit later. Of course bond speculators would lie in
wait for the Fed and ambush it at the moment it was ready to pick up its next quota of
government bonds in the open market.
The present monetary system promises risk-free profits to bond speculators. This
guarantees that the interest rate structure will keep falling indefinitely. Astute businessmen
who understand the interaction between finance and production will stay on the sidelines.
They will not join the mad tea party of teaser rates whether offered in the subprime mortgage
market or whether offered on loans to finance future production. Teaser rates are there to
tempt individuals and businesses to commit hara-kiri.
This raises the question just how sound a monetary system is that wants to create
money, lots of it, but can only do it through bribes and blackmails. This also raises the
question how it is possible to treat Keynes’ system with respect.
* * *
Mine is a cry in the wilderness. You had thought that the political system was rotten as it was
a system of bribes, blackmails, and vote-buying facilitated by irredeemable currency. You had
thought that the judiciary was rotten as no complaint about the fraud involved in the checkkiting
conspiracy between the Treasury and the Fed would ever be heard in a court. You had
thought that victims of the Ponzi-scheme whereby the government would sell bonds, which it
had neither the means nor the intention to pay off, could have their day in court.
But look: the educational system, our only hope for the future, is equally rotten. Its
faculties of criticism are so badly disabled that one can no longer hope for an open discussion
of burning issues. Keynesians, in concert with their Friedmanite comrades, control
everything: monetary policy, fiscal policy, the judiciary, appointments and the research
agenda at universities and other think-tanks, the publication programs in the editorial offices
of scholarly journals. A Cassandra such as myself would never get a hearing before the
disaster struck.
Now, as it turns out, I won’t get a hearing even after disaster has struck. Keynesians
and their Friedmanite cronies want to control the rescue effort and they certainly do not want
to see their past errors and misdeeds, that lie at the root of the problem, exposed to public
scrutiny.
The economic and financial crisis that is plaguing the world is extremely serious.
Damage to the social fabric could be even greater than that during the Great Depression. But a
reasoned, high-level discussion on the genesis of the crisis is ruled out. You have to buy the
official crap on the global savings glut. You are not allowed to challenge the official dogma of
under-consumption even after the most wasteful episode of over-consumption in history,
running up private and public debt to stratospheric heights.
The present crisis is about past, present, and future destruction of capital due to the
Keynesians’ deliberate policy of driving down interest rates. Education of public opinion
about these matters is sorely needed. Keynesians have been successful in convincing the
public that their monetary policy to drive down interest rates is a blessing. But the truth is that
falling interest rates erode capital, because the return from earlier investments proves
insufficient to amortize debt contracted at higher rates. At the end of the capital erosion road
comes the realization that production and finance stands bereft of any capital. The result is a
credit collapse that can no longer be covered up with the usual Keynesian nostrums
My conclusion is that the latest move of the Fed is going to entrench deflation through
entrenching the trend of falling interest rates. The mechanism works through bond
speculation, making risk-free capital gains available to speculators, who will then bid up bond
prices unopposed to any high level.
Other observers may violently disagree with this view. For example Clive Maund had
this to say: “So Treasuries spiked yesterday [on March 18], but the large gains were almost
entirely erased by the drop in the dollar… So in an environment where the Fed and the
Treasury are going to have to create dollars, i.e., to dilute the currency, to prop up financial
instruments… who but a complete imbecile is going to buy them?… The Treasury market
will collapse in due course anyway despite, and perhaps even because of, the Fed’s desperate
and reckless attempts to backstop it.”
Not so fast, please. Ultimately the market for Treasury bonds will collapse in a hyperinflationary
scenario, but this may be years down the road. In the meantime we have to face
the music that keeps the game of musical chairs going: the serial halving of interest rates to
enable bond speculators to earn risk-free profits. This stokes the fires of deflation, not the fires
of inflation. Obituaries of the dollar are written prematurely. The death throes of the Dollar
Almighty, as the U.S. currency was known not so long ago, will continue for quite a while yet
and, unfortunately, will cause a lot more damage to the world economy, and a lot more
economic pain to ordinary people.
It is an inane and malicious Keynesian propaganda that falling interest rates are good
for the economy, for you, for me, for business. On the contrary, they are lethal. Only low and
stable interest rates can help us to get out of the present mess – an unachievable goal under
the regime of irredeemable currency.
ReferenceReference
By the same author: That Accursed Propensity To Save, March 9, 2009,
http://www.professorfekete.com .
European Chaos.....As we have pointed out many times, we believe that at its heart, this is not only a crisis of the European welfare states and their unpayable debt. At its heart it is a crisis of the fractionally reserved banking system. The manner in which fiat money 'works', whereby the debt issued by sovereigns is used as the 'reserves' of the banking system, is deeply flawed. In the euro area this has merely become obvious more quickly than elsewhere as the supranational central bank stands in the way of member nations 'inflating the debt away'.
The entire monetary system rests ultimately on a mixture of coercion and faith. Legal tender laws prescribe that fiat money must be used in discharging public and private debts, while the idea that the debt issued by sovereigns represents a 'reserve' for the fiat money issued rests on the notion that these states will forcibly take more of their citizens wealth in the future. Given the size of the liabilities, both currently extant and so-called 'unfunded' liabilities, it appears people think that there is a sheer endless reservoir of wealth that can be plundered. Or rather, 'used to believe'. Confidence in this system certainly appears to be crumbling, although no-one in the establishment as of yet questions the system as such, at least not publicly.
Many .... fall into confusion on specific relations with the State, even when they concede the general immorality or criminality of State actions or interventions. Thus, there is the question of default, or more widely, repudiation of government debt. Many .... assert that the government is morally bound to pay its debts, and that therefore default or repudiation must be avoided.
The problem here is that they are analogizing from the perfectly proper thesis that private persons or institutions should keep their contracts and pay their debts. But government has no money of its own, and payment of its debt means that the taxpayers are further coerced into paying bondholders..... For not only does increased taxation mean increased coercion and aggression against private property, but the seemingly innocent bondholder appears in a very different light when we consider that the purchase of a government bond is simply making an investment in the future loot from the robbery of taxation. As an eager investor in future robbery, then, the bondholder appears in a very different moral light from what is usually assumed.[25] --M Rothbard, the state vs liberty
we can guarantee cash benefits as far out and whatever size you like, but we cannot guarantee their purchasing power. --Alan Greenspan testimony to the Senate Banking Committee, 2005
A Talk with David Graeber about his book "Debt: The First 5,000 Years"
Thursday, August 25, 2011, 7:00:00 PM
Much of what we thought we knew about the history of debt, credit and money is just plain wrong -- or woefully inadequate. Anthropologist David Graeber corrects that in his new book "Debt: The First 5,000 Years." In this interview with Graeber, hear how we (as a civilization) got into the mess we're in, how (in some ways) we've been here before, and how we can possibly get out.
http://www.kuci.org/podcastfiles/668/Graeber.mp3
Out The Rabbit Hole radioshow podcast feed
http://www.kuci.org/podcasts/?ShowID=668
"I know not whether taxes are raised to fight wars or wars are fought in order to raise taxes." – Thomas Paine
"Be thankful we're not getting all the government we're paying for."-Will Rogers
“Paper money eventually returns to its intrinsic value ZERO” – Voltaire 1729
and near to the opposite of the goldbug religious stuff that Elihu for some reason thinks should also be included with Graeber.... Apparently Graeber is a provocation to those who buy into the mythology that gold is either more real, or more originally, money than archaic credit and potlatch. It obviously and painfully isn't. If there's something even more insidious than the real-existing Federal Reserve, then it's definitely the gold mining companies who would end up replacing it in such a scenario.
The rationale of gold
The first thing to know about gold is that there is no alternative to it. Gold is the one and only commodity that has no marketing problem. There is no sales resistance and no competition to overcome. --Melchior Palyi (1892-1970),
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