(text from within article)
Astute observers call the dollar a fiat currency. Fiat means force. It’s true that we’re forced to use the dollar (e.g. by taxes on gold) but the dollar is also irredeemable. There’s no way to cash it in. The dollar is credit that is never repaid. Today’s dollar is a dishonored promise.
This was not always true. Before 1933, the dollar represented an
obligation to pay 1/20 ounce of gold. People could deposit gold and get
paper notes in receipt. Those notes circulated, and any bearer could
redeem them for gold. Back then, $20 was not the gold price. It was the legal rate at which gold was deposited and redeemed.
In 1971, President Nixon changed the monetary system with the stroke
of his pen, making the Fed no longer obligated to redeem dollars for
gold. The consequences of using debt as if it were money were soon
clear. Rising debt became a more serious problem than rising prices.
To understand debt, credit and the importance of redemption, consider
Joe borrowing sugar from neighbor Sue. To pay Sue back, Joe goes to the
store, buys sugar and hands it to Sue. Not only is Sue repaid; the debt
goes out of existence—it is extinguished. Borrowing money used
to be like borrowing sugar. The repayment of debt in gold-backed
dollars settled the loan and wiped the debt clean.
Not anymore, since Nixon detached the dollar from gold. By making
people pay with paper-only dollars, each debt is transferred, not
cleared.
Suppose Sue owed Joe $1,000, then hands Joe ten $100 bills. Sue gets
out of the debt loop. But now the Fed owes Joe the $1,000. What does Joe
do? He deposits his cash in a bank. Now the bank owes Joe money, while
the Fed owes the bank. What does the bank do? It buys a Treasury bond.
Now the Treasury owes the bank. And so on.
By Nixon’s design, the system omits a crucial feature. The
extinguisher of debt, gold, is not allowed to do its job. Debt can only
be transferred from one party to another. It’s like a lump being pushed
around under a rug. With no means of final payment, that lump is never
put in the trash. Debt is never extinguished.
In fact, the debt must increase, because the interest is constantly
accruing. Interest is added to the debt, as it can’t be paid off either.
Total debt must grow by at least the interest. Debt actually increases
faster than that, because the government craves what now passes for
growth.
The rate of debt increase is proportional to the debt itself. It is
not a fixed dollar amount, such as $100 billion a year. It is instead a
percent of total debt. Mathematics has a term for this type of growth:
an exponential function.
Exponential growth is not sustainable, according to credible
scientists. Mainstream economists ignore this fact in the hope that that
somehow growth can outpace debt, one year a time.
But exponentially rising debt is not sustainable because the capacity
to service the debt is finite. Without a means of extinguishing debt,
servicing is merely borrowing new money to pay off old debts. This is
the equivalent of taking out a home equity loan to get money to pay the
mortgage.
The U.S. debt is putting us in danger of economic catastrophe. Like
Greece, which found no more buyers for their bonds, the U.S. relies on
selling new bonds to pay interest and principal when due. The difference
is that the whole world bids on U.S. Treasury bonds, for now. But
eventually, market participants will realize that the American debt
cannot be paid off.
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- This site is the inspiration of a former reporter/photographer for one of New England's largest daily newspapers and for various magazines. The intent is to direct readers to interesting political articles, and we urge you to visit the source sites. Any comments may be noted on site or directed to KarisChaf at gmail.
Thursday, February 27, 2014
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