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Five Core Economic Facts

EconomicFacts

Scores of economic figures go screaming across our screens every day, many of them contradicting yesterday’s figures, and perhaps half of them based upon lies. On top of that, we have dozens of economic theorists arguing back and forth. In the end, it’s all too muddled for most of us to make out. We each have our guesses, but none of them are terribly certain.

So, this week I’d like to point out the central economic facts of the moment, five fundamental conditions that we should all be clear on.

Obviously I’m not a fan of any of this, but it I think it’s crucial that we see what really is. Later, we can consider what we’d like to be.

Fact #1: We have debt-burdened money.

Dollars are created in tandem with T-bills, and T-bills pay interest. So, creating a dollar always creates an obligation to pay interest beyond the dollar amount.

But where do those extra dollars to pay interest come from?

Well, from more newly created dollars of course – but dollars that have interest requirements of their own.

What this means is that unless more and more dollars are made all the time, all the debts that are spun can’t be covered. Such a system cannot resolve unless there are debt-free dollars that can cover the gaps. And presently there are none.

So, the dollar system can run effectively in one direction only. It can operate smoothly while creating ever-more currency, but if the system starts to contract, there will be a currency shortage. And that leads directly to trouble.

Fact #2: We have unpayable debt.

Official US government debt is now about $20 trillion, and forward promises are probably north of $200 trillion. This will never be repaid under any typical scenario. And other countries are worse.

Right now, the central banks are buying up all sorts of bad loans to keep things going, but eventually, this problem will resolve in one of two ways:

  1. Debasement, aka inflation. Print up enough currency units to drive a burger to $1,000, and all those loans can be paid back pretty easily. There would be disastrous effects, but the debts would be covered.

  2. The nations could simply say, “Tough luck, we’re not gonna pay you back. Have a nice day.” That, however, would create a lot of bad feelings, so a default needs an excuse. And for a major nation, about the only excuse strong enough is war.

There are a few exotic possibilities, such as central banks printing money to buy the national debts then forgiving them, but those are problematic as well.

So, when reality can no longer be evaded, the solutions look pretty grim.

Fact #3: Stock and bond prices are maintained by the central banks.

The Federal Reserve itself has bought many trillions of dollars of stocks and bonds since 2008. This is being done to keep the (critical) upper middle class happy and paying taxes.

Without central bank buying and other tricks like stock buy-backs, the various investment markets would have crashed deeply. Trillions of dollars pumped into a fixed-size pond created a lot of liquidity.

If this wild buying stopped, the markets would lose their perennial backstop, and millions of supremely reliable subjects would be screaming in the streets.

Fact #4: Interest rates can’t be allowed to rise.

What I’m addressing here is the interest on national debts, but since they overwhelm the markets, more or less everything else would be dragged along.

Right now, government bonds pay shockingly low rates of interest, some of them actually negative. But if they rise – as they would in any “normal” or “healthy” scenario – the interest on all those national debts would be unpayable; government agents would almost have to go house to house and drag away assets.

Fact #5: Pension funds are based upon fantasies.

A large number of pension funds, believe it or not, are basing their calculations on annual returns of 8%, a figure than no one gets on a reliable basis these days. The “safe” investments pay about 2%, where they must stay because of Fact #4 above. A few weeks ago, the governor of Illinois had a fit when the state’s pension calculation was cut from 7.5% to 7%. He’d never get even that rate of return in any case, but it trimmed the state’s fantasy figures, requiring hundreds of millions in tax increases.

Illusions like this can be maintained for only so long. Right now the public is playing along, dreaming that it will all just work out somehow, but the end of their game will most certainly come.

Are They Locked into a Corner?

It would seem the financial overlords have painted themselves into a corner… and indeed they have. Unfortunately, there are still force majeure escapes available to them – extreme events, real and/or theatrical, that would justify a complete wipeout of the current financial regime and the installation of a new one.

And, it should be said, the overlords have reason to be confident about such scenarios. After all, no matter how wild their demands may be, they get 99.9% compliance. So long as they slap the masses with some high-intensity fear and then make a bunch of promises, the odds are high that they’ll get away with whatever they want.

And what would they like? Well, they’ve already told us: They want negative interest rates and a ban on cash. That gives them full manipulative powers and turns all the mundanes into serfs. To really sell this plan, however, they’ll need something appetizing to go with it, and they’ve been hinting about that too: guaranteed basic incomes.

Guaranteed basic incomes would be like welfare without the stigma, because everyone would get it, with no exceptions. (With reduced bureaucracies too.) I’ve dramatized the whole plan in The Breaking Dawn, but suffice it to say that it doesn’t end well for most people.

Is There No Answer?

Sure there is, but it requires courage, determination, and personal initiative. For those who prefer to shut up, sit still, and let the system drag them along, things look bleak.

* * * * *

If you’ve enjoyed Free-Man’s Perspective or A Lodging of Wayfaring Men, you’re going to love Paul Rosenberg’s new novel, The Breaking Dawn.

It begins with an attack that crashes the investment markets, brings down economic systems, and divides the world. One part is dominated by mass surveillance and massive data systems: clean cities and empty minds… where everything is assured and everything is ordered. The other part is abandoned, without services, with limited communications, and shoved 50 years behind the times… but where human minds are left to find their own bearings.

You may never look at life the same way again.

Get it now at Amazon ($18.95) or on Kindle: ($5.99)

TheBreakingDawn

* * * * *

Paul Rosenberg
www.freemansperspective.com

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  • Rien

    To No 1: the part concerning the growing money supply because of interest is not entirely correct. Interest does not create the need for an expanding money supply. It would if all interest and all debt would need to be repaid at the same time. But that never happens. We usually pay interest and principal in terms over time.

    It is entirely possible to have a constant amount of money in circulation and still pay interest. It is easy to see what happens: Take a loan of $100 to be payed back in eleven instalments of $10. After the first $10 is payed back, the bank can now use that $10 to buy something from the loan taker. The loan taker then has again $100 to pay back the rest of the loan (with interest).

    Hence interest is a transfer of production from the loan taker to the loan giver. Nothing more and nothing less.

    Money is however indeed always created in pairs: money and debt. At creation money comes into existence as does debt. When the money is payed back, the debt vanishes.

    Thus to have an ever expanding money supply it is necessary to have somebody or someone that never pays back his/her debt.

    I do not think I need to point out who that is…

    • Paul Rosenberg

      Perhaps not a point worth belaboring, Rien, but I’m still seeing X+Y>X.

      Either way, the money system is a serious problem.

      Peace.

      • Rien

        I do get a little annoyed when I read “because of interest the money supply must keep expanding” as it is plain wrong. I find it especially annoying if it is said by people I respect ;-).
        It is a widespread fallacy that sends many people off on the wrong track imo.

        Thus no, X + Y does not necessarily produce > X because of the factor time.

        An exercise:
        – Two people, Banker (B) and Farmer (F).
        – F takes a loan from B of $100, agrees to pay back $110 in 11 payments of $10.
        – Initially there is $100 in circulation.
        – F pays back $10, has $90 left.
        – Now the “sleigh of hand”: instead of writing down $10 and thus lowering the circulation by $10, the Banker decides that he wants to eat and buys $10 of potatoes from F.
        – F now has $100 and can pay back the remaining $100 without problems.

        At no point in time has there been more than $100 in circulation.
        Thus the money supply did not need to expand to allow interest payment.

        I am no professional writer, but maybe it’s an idea for you for an article?

        I have done a lot of thinking about our monetary system, and there are problems with it. Banks are one of the problems. Simply introducing a banking system creates a problem. Another issue is saving and settlement in the same “coin”. If you are interested, please feel free to drop me a mail at rien-magic-overbeterleven.nl (replace the magic with the famous sign)

        • Paul Rosenberg

          Thanks Rien, I appreciate the details. I’ll go over this carefully.

          • Jak Duk

            Please go over this carefully as well. The arguments presented here are sound but they are based on reason and the current financial system no longer is. There no longer is any relationship between goods, services, time and money in any real sense. It is not a matter of interest it is merely a matter of electrons, i.e. striking the zero key on a computer keyboard. The money supply and many other economic terms have become irrelevant. No one knows how much money there is and no one cares. To continue the banker/farmer example – the banker “loans” the farmer 100 by tapping on his keyboard and increasing the farmer’s checking account balance. The farmer promises to pay back the electrons but never does and so the banker taps his keyboard again and adds 110 to the banks balance as if the loan was repaid. The bank is the Treasury and the farmer is the Fed. There is no interest on the money that is created to pay the interest since there never was any money to begin with. I call it infinite money, there is no interest on it since it is never going to be repaid other than by the typing on a keyboard, the same way it was created. There is no exchange of goods or services, time or labor, the money simply wasn’t and now is. Maybe I record it, maybe I don’t, really doesn’t matter since I can just as easily record its being repaid. A billion or a trillion is merely a matter of three keystrokes and to the people working the keyboard it doesn’t make one bit of difference.
            The most important point of this thread, in my opinion, is the last.Rien is quite correct that it is not the system and it cannot be fixed,not even with education, for the problem is not ignorance but human nature – man is a corrupt being and that will never change and thus he destroys, denies and desecrates the very thing that sustains him – always has and always will.

          • Paul Rosenberg

            I shall. Thanks.

        • Donald Beal

          Similarly I get a little annoyed when I read “it is possible to have a constant money in circulation and still pay interest”. Of course this is true, and economists even have cute words like “flow” and “velocity(sic) of money” when modelling this. As you rightly say, interest is a transfer from loan-taker to loan-giver. And as you also rightly point out, the interest can effectively be paid in labour, or potatoes, or other assets, instead of money.

          This does _not_ however, negate the fact that the financial system creates money without creating the money to pay interest, and that the money-creators (banks) require interest to be paid back in money. Yes, *if* the banks spent into the economy the amount of the interest, and only made new loans to replace repaid loans, a steady-state could be achieved. But they _don’t_. USA banks have increased their loan books by an average of 4% per year from 2010 to 2015 (forbes). This means that, in addition to loaning out money as fast as money is repaid, they lend out new money as fast as interest comes in. One reason for borrowers to take the new money is to repay the interest on the old loan, _despite_ the obvious disaster to come.

          So, the simple argument that the loan-book (aka money) has to increase every year to repay the interest is actually a _very good approximation_. The theoretical possibility that economies could run with fixed money simply does not occur.

          _Moreover_, even if repayment was in other assets, then the banking system would _still_ receive a steady stream of assets from the non-financial economy into the banking system as a result of spending the annual interest on trillions of bank loans. Maybe it would have taken an extra decade or two to reach the present level where big city centres have skyscrapers full of banking systems, and every bankster has a walled mansion, big jet, and yacht, but they would still get there. We would still have the problem…

          • Rien

            That is heartening to read Donald. Yes, you got it. And that is the first time I see somebody else writing about this.

            And you see how that puts the “cause” in an entirely different corner. It is not the money system per-se, but how the people (banks) use the system. How they game it.

            This is not something that can be fixed by “going gold” or creating another fiat system. In fact, this is not something that can be fixed. While we can try to put some laws into place ultimately it wil always fail because of, well, people. Laws do not (can not?) create stable systems.

            My conclusion is that people need to be educated about this so each and everyone of use can protect himself.
            My personal protection is simple: I use money for transactions but all savings go into tangibles.

  • Mercy Otis Warren

    Mr. Rosenberg, do you or any of your readers know if government owned land (including land underwater and all the resources contained thereon or thereunder) is counted as an asset on the government’s balance sheet?

    • Paul Rosenberg

      I don’t know for sure, Mercy, but to my knowledge it is not.

      • Mercy Otis Warren

        I did not think it was either. Perhaps if it were (though I have no idea how they would value the land and its resources), the country’s outstanding debt may not look as bad. Don’t get me wrong. I think they should sell all of their land holdings to private parties, but as it stands now, I wonder if this may allow the charade to go on considerably longer, hence delaying the reset. I am not sure if this idea has any merit; just a thought.

        • Paul Rosenberg

          Something I’ve thought too. :)

        • lutek

          It won’t work. Selling government assets can be used to take inflated dollar from the market but not to pay debts. We take people money and give them land to give them back money? what you propose is to give land to people for free. Government needs growth to pay debts or it can steal from those who have.

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