Fiat Currency

Exposing the Ponzi scheme of fiat currency is necessary to better understand how it could facilitate the onset of a Kondratieff Winter. Most are unaware that the US dollar and in fact all major currencies are backed by nothing more than the full faith and credit of that sovereign nation.

What sustains its ability to serve as a store of value or to pay for goods and services is public confidence in the ability of each sovereign nation to honor their notes and maintain a level of money supply that preserves the relative purchasing power of each unit over time. The US has been able over the years to maintain that public confidence through clever and discreet policy actions that were portrayed in our Dollar Hegemony section. That confidence, however, is in jeopardy now that our Fed has its foot on the monetary inflation pedal and fiat currency as we know it may be an endangered specie, pardon the pun.

As you will see in the following papers, fiat currency comes about through fractional reserve banking and is inflationary by its very nature. It explains why a soda costs over one dollar now when it was only 5 cents not long ago. It accounts for the ability for consumers and governments to spend recklessly seemingly without consequence and could well account one day for the havoc wrought by all of the excesses it spawned. No fiat currency has ever survived long term, and the following material shows why. 

1.   Why Does Fiat Money Seemingly Work? – This narrative was selected for its amusing account the failed fiat schemes of the Romans, the medieval goldsmiths, Charles II and the Bank of England until today to underscore the long term limitations of currencies not backed by something of universal value.   

2.   1966 Paper by Alan Greenspan - A very telling narrative written by the maestro himself long before he was a household name. In 1966 Alan Greenspan wrote in a newsletter exactly how the gold standard serves to reign in runaway deficit spending and how there is no way to protect savings from being confiscated if a gold standard were to be abolished. Seven years later it was, and ever since the purchasing power of the dollar has been steadily eroded.

3.   The Twilight of Redeemable Debt - Republicbroadcasting.org hosted this piece from The August Review that shines proper light on an event that I have reported on this site as one of the most important single economic developments of the 20th century- the full pivot to an unbacked, fiat currency by President Nixon in 1971. Largely ignored by the financial press for decades, The August Review here frames its significance by examining the debilitating nature of the marginal productivity of debt brought on by irredeemable debt via fiat currency. It explains how prosperity is hindered under such a policy by explaining how it defies the Universal Law of Conservation of Energy and Matter. Of course, this creates conspicuous consumption, which denies capital to chase its highest utility and thus promotes inefficient allocation of capital to create one bubble after another.

4.   Austrian Economic Theory - This article compares the Austrian Economic Theory free-market approach to monetarism to the fiat system now entrenched in the US and major industrialized nations. It denounces the Fed and the fiat system for its systemic flaws in the clearest and most striking manner possible in just four pages. It exposes how the elite have corrupted the monetary system with a fiat currency approach suited to their political and economic satisfaction at our expense. It concludes that only a currency backed by gold and silver can prevent such corruption and that we are headed for either a hyperinflation or a deflationary Kondratieff Winter. 

5.   The Greenspan Legacy of Hyperinflation - Adrian Douglas does a fine job explaining the artificial stimulation of the economy by the Fed and how the Fed may attempt to override a Kondratieff Winter through repeated lowering of interest rates. He concludes that the Greenspan legacy will indeed be the worst of all fears- hyperinflation.

6.   The Dollar Has Gone Metastatic – This article from Howestreet.com is a four part series on the decay of the dollar that illustrates the severe decline in purchasing power of the dollar over time using graphic charts to color the acute analysis. It exposes the Fed for creating the dollar bubble through years of sustained monetary expansion of the currency base. It asserts that a fiat system of currency cannot endure in the long term because it is rife with too much temptation for abuse through excessive printing. 

“Helicopter Ben"

A classic Kondtratieff Winter is noted for purging enormous accumulated debt in brutal and expedient fashion. Staggering asset deflation destroys wealth across the board due to a vacuum of purchasing power caused by severe credit restriction and disclocation in the capital markets. The fallout enables a new economic cycle of growth to begin again as asset prices adjust down to realistic and sustainable levels. However, as the following material suggest, the next Kondratieff Winter may mutate into a different beast altogether, one whose fallout is just as severe but wrought in a different way. How it plays out will be directly attributed to the policies and actions of our Federal Reserve (Fed), headed by one Ben Bernanke.

He was dubbed “Helicopter Ben” shortly after a 2002 speech endorsing a protracted monetary stimulus plan as being the equivalent of noted economist Milton Friedman’s “helicopter drop” of money. His sudden and steep rate cuts of September 2007 may enable that moniker to stick for some time to come.

Here’s the dilemma the Fed is now beginning to face as we head into a recession or worse: do they restrict credit to contain inflation and preserve the sanctity of the dollar and in so doing allow the capital markets re-price assets downward or do they attempt to stave off the inevitable asset deflation by flooding more liquidity into the system to prop up asset prices and stave off a recession? I would argue the most prudent move is to reign in liquidity so that the resulting wealth destruction from the asset deflation, while painful, would at least enable the economy to sooner emerge from the downturn in a position to begin the next cycle of growth with modest inflation and a currency secure from being devalued. Given that this downturn may indeed be far worse than imagined it is worth considering whether the Fed, knowing this, might instead perversely attempt to hyper-inflate the economy to insure an ongoing stimulus to the economy. This would represent the flipside of the Kondratieff Winter scenario-unprecedented hyper-inflation.

Such a path would entail draconian consequences for our economy and way of life but would benefit the wealthy far more than the middle and lower class of our country which comprise over 90% of its citizens. This is because the wealthy are inelastic to the inflation of  basic goods and services of day to day life because they comprise such a small percentage of their overall wealth and they can absorb hyper-inflation much better than the rest who would struggle or succumb to ever-rising prices because their wages gains would not keep pace with the inflation. There is a precedent for us to ponder in the hyper-inflation seen by  Germany in the 1920’s as the mark inflated to the point that price inflation reached over 1000% ! We know what happened next. Which path will the Fed choose? If history is any guide the sure answer is they will try to print their way out of the mess simply because it’s what they are hard wired to do. Lead by Alan Greenspan, the Fed has been pumping excessive liquidity into our markets in both expanding and contracting economies for decades to induce the dot com and real estate bubbles and flood the world with dollars. Ever the demagogue, Chairman Greenspan championed such irresponsible policies such as the 2001 tax cuts, unfair and onerous mortgage products and leverage through paper derivatives that have now all combined to flood the world awash with trillions of dollars unable to be adequately repatriated back because we don’t produce enough goods and services to offset the massive liabilities we have accrued. After such a long and protracted policy of expanding the monetary base why should we expect them now to make the hard choices between the sanctity of our currency and the value  of our asset base? As they say, people tend to choose the devil they know best and the Fed has chosen the inflationary monetary easing devil for quite some time. My bet is you can expect this approach to continue unabated throughout this contagion.

The articles displayed herein are intended to frame the dilemma now facing the Fed and reveal many of the issues impacting past and future Fed policy. They will showcase specific policy speeches and follow Bernanke throughout his ascension in academia to reveal his passion for the Great Depression and his acumen of monetary policy in those deflationary periods. Does anyone find it rather peculiar that the one chosen to guide us through this particular period is someone so acquainted with the Great Depression and so outspoken about a particular approach to its aversion (money drop)?  It’s no wonder why he was the perfect choice to succeed Greenspan- no Paul Volker types were wanted here.

1. “Helicoper Ben is no Paul Volker” A brief piece underscoring the significance of the Bernanke appointment as new Fed chief in late 2005. Peter Schiff postulates the need for a specific policy directive-taking away the Greenspan punch bowl before we drink ourselves to death.
   
   

2. Helicopter Ben Earns his Wings- a scathing rebuke of the Fed’s surprise 50 basis point rate cut in September 2007 by Peter Schiff who argues that the Fed has should have been raising rates to inflict the necessary purging of excesses in the market. He points out the hypocrisy in Bernanke’s own statements preceding the cut that lamented the lack of savings by Americans while taking action days later to sabotage that aspiration given that rate cuts induce inflation that punishes savings.
   
   

3. Ben Bernanke’s Quest to Prevent the Second Great Depression- this underscore the arrogant  Bernanke mindset that the response of central bankers to averting a crash is more crucial than the severity of the factors surrounding the crash.
   
   

4. Ben Bernanke Walks the line - Time magazine expose on the dilemma facing the Fed.
   
   

5. Will “Helicopter Ben” Ride to the rescue- an amusing blog posted in Business Week online that ponders a Fed money drop.
   
   

6. Ben Bernanke: An unworldly professor- This article questions the ability of someone so groomed in academic circles to be fully prepared to conquer the looming challenges present in such a transitory stage of global economic markets.|
   
   

7. Deflation: Making sure it doesn’t happen here- the text of Bernanke’s  speech in late 2002 regarding deflation and money drops.
   
   

8. Bernanke testimony to Congress in late Summer 2007- The text of this speech clearly shows a Fed out of touch with reality and far behind the curve in their ability to contain the sub-prime fallout. Only days later the crisis deepened in the face of this rather indifferent perspective on the contagion at the time.