A World that Operates by Financial Cheating and Unsound Money Is Doomed

Mish

It's all phony money but there's no revolt yet.

Value for Value

My friend Hugo Salinas Price wrote a short post that I agree with. 

Please consider A World that Operates by Cheating Is Doomed

In ages past, gold and silver provided humanity with a system of economic co-operation among productive humans, which was fair to all participants.

With gold and silver, humans were trading value-for-value: what changed hands were amounts of physical gold or silver, or at least, Bills which were unquestioned claims upon gold or silver. 

When the exchange had taken place, everyone was happy! The seller because he had gold or silver, in exchange for the goods or services he offered; and the buyer was pleased because he had the goods or services he wanted, and he got them by tendering gold or silver in exchange. 

So, everyone was pleased: the buyer because he got the goods or services he wanted, in exchange for his gold or silver; and the seller was pleased because he traded the goods or services he had to offer, tor gold or silver. 

Under the present monetary system, there can be no justice or "fair trading", because all the World's MONEY IS FAKE MONEY. No money in today's world is gold or silver, nor does it represent an unquestioned claim upon a stated amount of gold or silver.

And a gigantic shooting war will mark the end of our times, as a result of the cheating involved - all because fake money was forced upon humanity.

No Consequences, Yet

Except in isolated hyperinflation cases, governments have learned there are no consequences to the ruling class (at least yet) for unsound money.

Never ending wars are one result. Look at Afghanistan. If people had to pay for wars with real money, their own, they would revolt. 

On an ongoing basis, Democrats want unlimited social spending and Republicans want endless military spending. The compromise is both sides mostly get their way and the value of the dollar sinks.

It's all phony money so there are few practical constraints. 

Meanwhile, the rich get richer and the middle class shrinks but the reason isn't obvious. The media blames Google, Microsoft, and Amazon instead of unsound money, the Fed, and Congress.

The dollar would collapse except for the simple fact the EU, Japan, and China are all doing similar things to varying degrees.

So we plod along, war after war, with some of them never ending as debt piles up so high that no one can even comprehend the numbers involved.

This will end in a currency crisis of some sort perhaps in conjunction with the shooting war Hugo envisions.

I am not suggesting the end is near. How long the shrinking middle class will put up with this is a mystery.

But when the currency crisis does arrive, expect this global cry: No one could possibly have seen it coming.

Mish

Comments (101)
No. 1-33
Democritus
Democritus

Well yearly inflation of even 10% is sustainable. It's only issue is a constant shift of wealth, but as the media are now well-trained in making the middle class focus on other stuff, that's not a big problem. I mean there's always that football match, some celeb dress failure, some group A vs group B problem... You name it!

Eddie_T
Eddie_T

"On an ongoing basis, Democrats want unlimited social spending and Republicans want endless military spending. The compromise is both sides mostly get their way and the value of the dollar sinks.”

Check.

"Meanwhile, the rich get richer and the middle class shrinks but the reason isn't obvious. The media blames Google, Microsoft, and Amazon instead of unsound money, the Fed, and Congress.”

Check.

So depressing. The only solution I ever came up with was to get rich myself instead of continually getting screwed. I’m not exactly there yet, but at least I have a goal in life.

Greggg
Greggg

I wonder the about significance of a reserve currency with todays weapons characteristics. We so far, are the last country on earth to hold reserve currency status. In the past, reserve currency status required a large navy to patrol and secure the shipping lanes. If it's true that nations have or are close to developing hypersonic missiles that can easily take out an enemy, US aircraft carriers and and other visible naval vessels would increasingly become useless against the new weapon, submarines being the only viable survivor.

zzznap
zzznap

bitcoin

Frilton Miedman
Frilton Miedman

"The dollar would collapse except for the simple fact the EU, Japan, and China are all doing similar things to varying degrees."

If you truly believe this author's premise - invest in countries according to debt to GDP ratio, as certain countries competitively increase their debt to "cheat", maybe that ratio is a measure of which countries have more "ammo" for the long haul, or once the proposed "event" occurs.

Where Japan is at #1 by a far stretch at 237%, S Korea, Sweden, Norway have dramatically lower ratio's.

Worth noting, countries with higher natural resource's appear to have lower ratio's....go figure.

IMO, best long term investment is tangible natural resources, not speculative (like GOLD or SLV) but grains, commodities, materials.

ohno
ohno

-10f and windy here let's just bet this shooting war over with i'm ready to kick the bucket as it is

bluestone
bluestone

I think for the states maybe its different but sound money in the UK wasn't so great because of land. There was a landowner class of around 5% and everyone else had to pay rent. The monopoly of land ownership doesn't seem like its very likely to be overturned. You could argue that land ownership is the true base of the pyramid.

William Eichler
William Eichler

Since your money is "fake" why don't you send me
a big pile of it... I'll pay for you to ship it to me.

PostCambrian
PostCambrian

I guess that there were no wars prior to Bretton-Woods. Oh wait, there was WWII, WWI, Spanish-American War, Civil War, and plenty of other wars going back to antiquity. Fiat currency might enable certain undesirable features of the international economy but war isn't one of them.

I think that there will be some repercussions, many unforeseen, due to the money supply expanding faster than real goods and services (GDP) but you are overstating the effect of fiat currencies.

PecuniaNonOlet
PecuniaNonOlet

Nice post Mish but it goes beyond fake money.

We now have fake food that provides little or no nutritional value to most people.
We have fake healthcare and education systems that offer little care or education. We have a fake criminal justice system, fake representation in congress.
We have fake religions and religious leaders and of course fake worshippers.

The list is nearly endless but what surprises me the most is how indifferent or clueless people are about the whole thing.

bradw2k
bradw2k

Now the question is: did Mish mean to have a bitcoin coin in the top picture, or was that an accident? ;-) Although it does kind of look like it's made of gold.

Bridgewater published an analysis of Bitcoin today. It's below Ray Dalio's essay. Interesting stuff. They throw out some numbers that the real market value of a Bitcoin, if gold owners sell up to half of their gold (to whom???) and diversify into Bitcoin as another "store of value", is somewhere in $30K to $90K.

Last line: "Bitcoin, for now, feels more to us like an option on a potential storehold of wealth." I read that as: it's still highly speculative.

Rbm
Rbm

For what its worth seems like i remember reading the romans mixing increasing amounts of cheaper metals into those gold coins when they were on the decline.

Casual_Observer
Casual_Observer

The middle class is growing not shrinking. It is just growing globally and not just in one country or region. We live in a global economy whether you like it or not. The global currency is the US dollar no matter what currency you want to count it in. Precious metals are traded in dollars. Value is measured in dollars.

FarmerCoolJ
FarmerCoolJ

Sometimes I wonder if you are posting these stories about gold and silver to confuse and excite the masses. Paper currencies have been around for centuries. In 7th Century China, they used paper currencies. There is not enough gold and silver in the world to support trade and commerce and especially for ease and comfort (you would need leather pants pockets to carry a few hundred dollars in silver coins in U.S. to buy something or pay for a service -- joke), paper currrencies were much better. With the backing of stable governments, paper currencies were introduced. What is downside. One is counterfitting, and the other is what happens when a government fails and can't back their currency. I think long before a goverment fails, citizens will be transferring their wealth to other vehicles than paper money. for instance, digital money, credit cards, and bitcoins have presently allowed people to easily transcend borders. Moving your money to another country's currency is simple. What are the chances of all countries in the world failing or having a depression or hyperinflation all at once are infinitesimally small. Countries have failed in the recent past with hyperinflation, but in the 21st Century, I believe that the digital currencies may give the forewarned, an example of an alternative currency vehicle.
J.R.

BornInZion
BornInZion

"Justice is driven back,
and righteousness stands at a distance;
truth has stumbled in the streets,
honesty cannot enter.
Truth is nowhere to be found,
and whoever shuns evil becomes a prey."

(Isaiah chapter fifty-nine)

To Da Moon
To Da Moon

So how do you envision a currency crisis playing out? Why would the dollar fall more than other currencies? Why would any of it matter? It's all fake money...

amigator
amigator

Excellent Mish. It doesn't have to be gold or silver (they have just been used in the past) tie the money to something that us pions can hold so that we can maintain some value in or hard earned monies and not just let the politicos continue to print ad nauseam. And not just another piece of paper like a stock certificate....

JonSellers
JonSellers

Lot's of false stuff here. Historically, people didn't buy and sell in silver and gold. Metal money was the province of the nobility and bankers. Real people traded in credit. The farmer got credit from the blacksmith to fix his plow, and when his crop came in, paid him back with food. The blacksmith then used the food to pay his own debts.

If the world actually traded in a fixed amount currency, there would only be a fixed amount of work that could be done. Fiat money, even though we don't really use it that way, allows for the creation of enough money that everyone can potentially sell what they produce, meaning more work. But, alas, we still think in terms of gold, so we treat our fiat as if it is a commodity currency.

General Ripper
General Ripper

Let's face it. No one individual knows how this is going to end. Irredeemable currencies have a pretty bad track record as we all know. My biggest fear is if there is a huge global currency meltdown of some kind, TBTB will use it to restrict liberties.
So keep some bullion, cash and maybe a rosary if your a RC.

Eddie_T
Eddie_T

I’d like to survey the readership to see what everyone’s expectations are.....of exactly.....or approximately.....when the coming currency crisis will hit.

And what country’s banks will go down first....and which one will be last man standing, so to speak.

WarpartySerf
WarpartySerf

"Ray Dalio's essay" Guru words of wisdom ..... from the 14 billion dollar net worth financial predator. He's obviously obsessed with trying to seem a "big thinker". And giving the serfs a piece of his brilliant advice. Forgive me if I pass.

Captain Ahab
Captain Ahab

I am of the same mind, both textually and judging by the photo. Only debt created by borrowing the excess of production, less consumption (savings), is real. Debt created by bookkeeping entries is fake. Fiat money and fake debt is a bad combination. Add in derivatives etc. and the result is implosion.

Eddie_T
Eddie_T

“It’s all phony money but there’s no revolt yet.”

This is exactly correct.....but maybe we should ask......”Why no revolt yet?".

I would argue that most people have it pretty good in the US and most other advanced western countries.

Maybe we are seeing the beginnings of revolt with Antifa and France’s Yellow Vests.
But it isn’t any kind of persuasive movement that gets big numbers of people out in the streets.

I like to look at certain things....how many people int he US have smart phones......the most recent number I see is from 2019....at that time it was 81% and rising.....96% have a cell phone.

Over 90% of households have access to a car.

What is the real homelessness rate? Nobody really knows....but a reasonable guess would still be way under 1% of the population....and a fair number of those are addicts and people with mental illness. My belief is that homelessness of less than 0.5% is unlikely to EVER happen, in the best of times.

The fact is that even the people at the bottom in this country seldom go hungry. A few do....more right now....in this pandemic time when work is scarce for laborers and the uneducated and under-educated.....but that will get better. We feed poor kids two meals a day at school in most places.

My point is that even our poor social safety net is so much better than what existed a hundred years ago....that not that much impetus exists to overthrow the rich and take back the means of production....or to change the way we create money.

Maybe we will see people eventually lose confidence in the phony money....but only if the present system changes to something much more austere...that’s my guess.

anoop
anoop

I think this can go on for at least another 200 years which means it’ll definitely outlive me and all of my descendants.

RJM Consulting
RJM Consulting

Re: Hugo's post... I think its time to address the lie within "real money". Nobody thinks it realistic to go back to 'weighing out ounces of gold" to buy a loaf of bread. What's more, even relying on the "value" of an ounce of gold (or silver) is still just relying on second (or third) hand information. Even in a time of instant information distribution, its not "real value" unless you have some idea of how much the gold coin in your hand represents as a portion of all the gold that is mined or known to be mine-able. Meaning, you would have to have "faith" in the reports from the gold mining industry (and the central banks, and any other repositories of significant amounts of gold). In other words, even a 'gold-based' currency requires a huge amount of faith. And, even if known/existing supply could be relied upon, there is little to no reason that you could rely on "tomorrow's" supply (given new discoveries, new sales from holders/hoarders, etc.) Once you get past the realization that all currencies have value that is dependent on some element of faith, the argument against a 'fiat' currency weakens. (At least to the extent that a fiat based currency's value is a function in the faith of its users that it will have value tomorrow.) To the extent that fiat based currencies reflect the confidence its users have in the promises made by its issuers, the question is not about the currency but about the promise-makers. That should be the focus of the concern, not whether or not the coin/piece of paper has any relation to some physical commodity that is (or isn't) in some vault somewhere.

Farmer Ted
Farmer Ted

Way forward:
 
Use the so far dormant power of a state, where their resources in a legal issue are necessary.  
 
The Constitution requires states to tender gold or silver coin in payment of debts.  The US mints those coins, but then the US charges a capital gains tax on those coins.   Obviously, such a tax means those coins will never circulate as money.  

How upside down is that? Consider this: a dollar is defined in the US Code as an ounce of silver (ref: 31 USC § 5112). Federal reserve notes are neither a dollar nor are they redeemable in dollars or anything else (perhaps they would be effectively redeemable in gold and silver coins without a capital gains tax levied upon those coins). However, there is no capital gains tax levied on federal reserve notes, but there is a tax levied on what is defined by statute as a dollar.
 
How to rectify this bizarre state of monetary affairs?

A state brings a claim in proper venue advantageous to it based on the holding from McCullough v. Maryland, where the court held that the power to tax is the power to destroy such that a state couldn’t lay a tax on US bank notes.   As applied to this issue of whether the US can tax what the states must use to pay their debts, based on the holding from McCullough, no the US may not.
 
Get rid of the capital gains tax on monetary coins, and let the market decide the price and whether they circulate. Waiting for the US Congress to pass laws eliminating the capital gains tax on monetary coins shows a lack of understanding of human nature. It simply is not in the interest of any member of Congress to make their duties substantially more difficult because it would significantly reduce their ability to create infinite amounts of credit and currency. It is in the interest of a state to establish a means to eliminate debts without having to first acquire federal reserve notes.

RonJ
RonJ

"A World that Operates by Financial Cheating and Unsound Money Is Doomed"

The Year of Jubilee came around every 50 years in Biblical times. Today we call it the Kondratieff cycle. Human nature never changes. It is the movie Groundhog Day over and over again.

Glass-Steagall was created so that what happened in the roaring 1920's couldn't happen again. At the end of the 1990's, Glass Steagall was dismantled so that what happened in the roaring 1920's could happen again. What is old, becomes new again.

WW2 made the U.S. producer to the world. The 1950's were the biggest growth in the U.S. middle class. The rest of the world eventually recovered and the process reversed. Wage growth peaked in the early 1970's. China eventually became producer to the world. The U.S. middle class is being decimated. A cycle rises, peaks and falls into a trough.

No country has ever permanently stayed on a sound money gold standard. The pressure becomes too great as a cycle inverts. As was written recently by a protester, "Where's My Check?" What happens when the Bread and Circuses stop?

Guns and butter broke the gold window. Martin Armstrong recently said that the dollars day as world reserve currency will end as of 2028.

Kevin78
Kevin78

Yes, because there were no wars before fiat currency was introduced...

Kevin78
Kevin78

As long as dollars are used by the US government for payments and receipts (taxes), and the US is among the largest economies in the world, the dollar will remain the primary medium of exchange. Try paying your taxes in bullion and see what happens.


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