Of Two Minds
MAY 30, 2018
Charles Hugh Smith writes excellent pieces on true macro level economic thought, and here he touches on a fatal flaw of the monetary system. With nothing of any tangible value backing up ink-on-paper currency, the only thing that gives it any temporary value is the faith it will can be used again in a similar transaction.
It doesn’t say on a bill that it is money. It says is “legal tender, for all debts public and private.” It is debt, usually used to pay for other debts, incurred by work or investment. But if you try to exchange that piece of paper with the government, the only thing you can get back is more paper, that represents more debt, in the form of treasuries, etc. It’s a shell game, a mirage. Gold is the exception.
The buck needs to keep changing hands to have any value at all; the buck literally can’t stop anywhere for good and end up worth anything. Because its real value is constantly heading toward zero over time.
When faith is lost that these pieces of paper will be accepted in the world at large for such debts, they become pieces of printed picture art and nothing more. Because while dollars are inarguably legal tender for debt, they can be exchange for nothing more than faith…faith that gets diluted every time the Fed adds to the already astronomical, un-repayable debt it has already incurred. Faith that is not, contrary to popular belief, in unlimited supply.
I often discuss systems and systemic collapse, and I've drawn up a little diagram to illustrate a key dynamic in systemic collapse. The key concepts here are stability and buffers. Though complex systems are never static, but they can be stable: that is, they ebb and flow within relatively stable boundaries supported by reserves, i.e. buffers.
In ecosystems, this ebb and flow is expressed in feedback loops between the weather, environment and plant/animal species which inhabit the ecosystem. Ideal weather/food conditions may spark a rise in an insect population, for example, which then enables an increase in insect-predator populations (fish, birds, frogs, etc.) which then increases the consumption of the insects and reduces the impact of the higher insect population.
In our complex socio-economic system, the buffers are largely invisible. As a general rule, "money" is our all-purpose buffer: if something becomes scarce and threatens the system, we print/ borrow into existence more "money" which is distributed to buy whatever is needed.
But "money" is an illusory buffer. If the well has run dry, no amount of money will restore ground water. If the fisheries have collapsed due to overfishing, no amount of "money" issued by the Federal Reserve will restore the fisheries. In other words, the natural world provides hard limits that money can only fix if buffers are available for purchase.
"Money" is itself a system, a system with financial buffers, buffers that have been consumed by the speculative excesses of the private sector and the financial repression of central banks. These buffers are largely invisible; few know what's going on in global liquidity markets, for example. Yet when liquidity dries up, for whatever reason, markets go bidless and asset prices go into freefall.
Flooding the financial system with "free money" only restores the illusion of stability. As noted in my diagram, restoring and maintaining an apparent stability thins buffers to the point of dangerous fragility.