Promises, Promises

What Can’t Be Paid,
Won’t be Paid
[courtesy Google Images]

Last month (July), AFP published an article entitled “Japan PM unveils $266 bn stimulus plan to boost economy”. According to that article,

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“Japan’s government and central bank have come under increasing pressure to do more for the economy.

“Therefore, [in July] Japan’s government announced a stimulus package worth more than 28 trillion yen ($266 billion) in its latest attempt to fire up the lukewarm economy . . . .”

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By itself, $266 billion in government stimulus doesn’t strike me as significant. Back around 2008-2009, the U.S. government injected $800 billion into the U.S. economy under QE1. Later, under QE3, the government injected $80 billion per month (almost $1 trillion per year) into the economy. These injections may have postponed a U.S. economic depression, but they didn’t generate much of an economic recovery.

Given that Japan is the world’s third largest economy, I don’t expect $266 billion (just one-third of the $800 billion injected during the U.S. QE1) to have much more effect on Japan’s economy than QE1 had on the U.S. economy.

This implies that Prime Minister Abe’s proposed “stimulus package” is more of a gesture to “do something” rather than a real economic remedy for the stagnating Japanese economy.

More, if Prime Minister Abe already knows his efforts at “stimulus” won’t succeed, the most-likely justifications for implementing his plan should be: 1) to buy time; 2) to shore up public confidence; and 3) to avoid admitting that Japan’s government and central bank have no workable remedies for Japan’s persistent economic problems.

Mr. Abe’s actions constitute an implied promise that he can solve Japan’s economic woes. But can Abe keep his promise?

• Japan’s inability to deal with its economic problems at the same time the U.S., China, England, the EU, and the globe, itself, are also facing interminable, insoluble economic problems is evidence that the world’s fundamental economic problems are not various and unique to each nation. Instead, the multitude of simultaneous economic problems on a global basis indicates that the fundamental economic problem is systemic.

We aren’t having one problem in Japan and a second, different problem in the U.S. and a third problem that’s unique to the EU. I believe we’re having one fundamental problem simultaneously in several countries but on a global basis.

If so, there must be a single, fatal flaw in the presumptions that lay the foundation for modern, global economics.

What could that flaw be?

If a single premise was adversely affecting virtually every nation, it would have to be a premise that virtually every nation has adopted as true, but which is, in fact, false.

Given that the world has never before suffered a truly global economic recession, we can speculate that whatever the false premise that’s been adopted by the world’s economists, it must’ve been adopted fairly recently—certainly in the last century; maybe in the last 50 years.

Q: What is the world doing today on a global basis that the world has never done before?

A: We’re using a debt-based monetary system throughout the global economy.

• The world’s economists presume that a debt-based monetary and economic system can replace an asset-based (gold- and silver-based) monetary and economic system—and do so without causing any fundamental problems, contradictions or economic depressions.

I believe that premise is false, stupid, and arguably wicked.

The debt-based monetary system can’t work on a long-term basis. People smart enough to create a debt-based monetary system must’ve also known that it would: 1) inevitably implode under the weight of its own lies and contradictions; and, 2) destroy a generation or perhaps even a nation. The debt-based originators didn’t care. They created the debt-based monetary system knowing it would ultimately lead to disaster. That’s wicked.

• Here’s the problem: In a monetary system based on assets (like gold or silver), you can’t spin tangible assets out of thin air and therefore can’t create more wealth to lend without first increasing your productivity. Unless someone works hard enough to produce and save more tangible wealth, there’s nothing to lend. Thus, the asset-based (gold-based) monetary system depends on and must encourage productivity

But, under the current debt-based monetary system, debt is nothing but a “promise to pay”. Promises are intangible. Anyone can make a promise. Because our debt-based monetary system is ultimately based on mere promises, our currency (a promise to pay) can be spun/promised “out of thin air”.

For example, “I promise to pay $1 trillion to every man and woman who reads this article to the end and also to each of their living heirs.” See how easy it is to make promises? Assuming 10,000 people read this article and they each have, on average, two kids and four grandkids, I’ve just created 70,000 times $1 trillion = $70 quadrillion in promises to pay (debt) into existence. In fact, if you’ll each send me $100, I’ll even promise another $2 trillion to each of you and your heirs for a total of another $140 quadrillion. Such a deal, hmm?

Of course, since I’m a small operator, no one would accept my “promises” to pay that much currency. Since no one is dumb enough to take my $140 quadrillion promise seriously, that debt-based currency wasn’t “really” created.

But, what if I were Janet Yellen or Barack Obama? It’s true that even as Janet Yellen, I couldn’t spin/promise $140 quadrillion into existence. There are limits as what the public will believe. Even so, as Chairman of the Federal Reserve, I could spin/promise $1 trillion into existence. That’s not a fantasy. It’s already been done several times in the past eight years.

Given that our currency is debt/promise-based, it’s possible for the world’s central bankers to “speak” trillions of dollars (or yen, pounds, euros, etc.) into existence—much like God “spoke” the universe into existence in Genesis 1.

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• However, the creation of more debt-based currency by means of mere promises is not a super-power reserved to only the super-rich and super-powerful.

Where do you suppose the debt-based currency came from to build or purchase your last new home? Say that house cost $250,000. When you signed the mortgage, the bank didn’t go into its vault and pull out $250,000 in cash and hand it to you. The bank merely wrote you a check or made a digital deposit into your bank account.

Where’d that debt-based digital cash come from?

It came from you

That debt-based currency was created when you signed your name to the mortgage note and thereby promised to pay the $250,000. Your debt, your promise to pay, created the $250,000 used to buy/build that house.

The bank didn’t really lend you $250,000 out of its own vault. The bank essentially certified that you were competent (had a sufficiently high credit-rating) to “promise” $250,000 into existence. Some people can only “promise” $10,000 into existence. Others can promise $250,000 into existence. Some can promise $1 billion into existence. The banks merely certify each of our credit ratings and therefore gives varying levels of credibility to each of our attempts to “promise” debt-based currency into existence.

Sounds nuts, doesn’t it? Can’t possibly be. I must’ve lost my mind, right?

Maybe so, but where did the $250,000 come from that paid for your last home? It did not come out of the bank’s vault. Somebody created that debt-based currency as part of the mortgage transaction and that “somebody” had to be either you or the bank. I believe you created that $250,000 in debt-based currency when you signed the $250,000 mortgage note and thereby “promised” to pay that $250,000 into existence.

Something similar seems to happen when you take your credit card to the 7-11 to buy a hotdog and a Slurpee. You create the debt-based currency used to make that purchase by signing your name to the credit card and/or the credit card receipt. By signing, you promised to pay. You created the debt/promise-based currency used to purchase that “food”. You created another debt-instrument that not only bought you a Slurpee, but also helped to support the debt-based monetary system.
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• It’s the debt-based monetary system that laid the foundation for “consumerism” and the “consumer-based economy”. Those terms can also be translated to mean “debt-ism” and “debtor-based economy”.

“Consumerism” is not much in the news today. Since the Great Recession, it’s been called into doubt.

However, prior to the Great Recession, serious economists advanced the fantastic argument that, for the global, debt-based economy to flourish, all Americans had to do was consume more “stuff”. We didn’t have to produce more “stuff”. All we had to do was be the world’s ultimate consumer. That is, all we had to do was be the world’s ultimate debtor. So long as we went deeper and deeper into debt (and thereby created more and more debt-based currency), the global, debt-based economy could survive.

Under the theory of consumerism, Americans were encouraged to “shop ‘til they dropped”–meaning “go into debt until they dropped”. Being consumers more than producers, the only way for Americans to keep on consuming is to go into debt. The ideology of consumerism thereby served the debt-based monetary system by generating more and more debt—at least for a while.

Think not? Then riddle me this:

Q: Why do you suppose banks allowed sub-prime mortgages in the late 1990s and early 2000s? Why did banks seemingly lend currency to people who they knew were highly likely to default (not keep their promises to pay) on their mortgages?

A: Because 1) the economy runs on debt-based currency; and 2) people with good credit ratings (“prime” borrowers whose promises to pay were rated as credible by the banks and credit reporting agencies) weren’t taking out enough new loans to keep the debt-based economy running. If “prime” borrowers wouldn’t go deeper into debt, then the doors had to be opened to allow “sub-prime” borrowers to go deeper into debt.

This whole debt-based monetary system is a Ponzi-scheme that depends on the creation of more debt this year to help service last year’s debt, and even more debt must be created next year to service this years debt. If, for whatever reason, the public stops creating enough new debt to service the old, then the government and/or central bank must step in to create more debt.

Isn’t that what happened prior to and after the Great Recession of 2008-2009? The prime borrowers weren’t creating enough new debt, so government passed laws and created incentives for sub-prime borrowers to pick up the slack by going deeper into debt. The banks knew these sub-prime borrowers probably wouldn’t keep their promises to pay—but it didn’t matter. To survive, the debt-based economy had to have more debt.

And, in fact, when the sub-prime borrowers inevitably defaulted on their promises to pay, their correlative debt-instruments (mortgages and notes bundled up into “mortgage backed securities”) became “toxic” (unpayable and therefore worthless) and $20 trillions worth of previous debt-based “wealth” disappeared from households. The resulting loss of paper capital (debt-instruments; promises to pay; IOUs) very nearly collapsed the U.S. and global economies.

Implication: When banks issued sub-prime mortgages, their primary motive was probably just buy some more time and postpone the debt-based monetary system’s inevitable “day of reckoning” for a few more years.

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• I know that all of this conjecture sounds fantastic and even irrational. But once you put a few fundamental pieces together, this conjecture seems to make some sense.

Consider:
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1. There’s no question that we have a debt-based monetary system.

2. There’s no question that debts are, fundamentally, nothing more than promises to pay.

3. That means that our “debt-based” monetary and economic system can also be fairly described as a “promise-based” monetary and economic system. Promises are easily made—and easily broken. We live in an economic system that’s primarily based on promises rather than production. How crazy is that?! In fact, how dangerous is that? If anything happens to cause the promises to be broken, the paper wealth associated with those promises will flat-out disappear and cease to exist.

4. The promise-/debt-based monetary system laid the foundation for “consumerism”. Under the theory of consumerism, you don’t have to produce anything tangible—all the consumers need to do is promise to pay. Promises are the consumers’ most important product. But, again, promises are both easily made and easily broken. When mere promises are broken, paper wealth disappears.

5. What about the Fed’s repeated claims that our monetary and economic systems depend on maintaining public “confidence”? Could the Fed be a bit more specific? Could the Fed tell us what, exactly, we must have confidence in? I have no doubt that the essential confidence is the belief that the promises to pay will be kept. I.e., so long as we have “confidence” that the debts will be paid, we can go even deeper into the new debt needed to keep the system running.

6. But, what happens if Americans and the world lose confidence in their belief that America’s debts/promises can and will be paid/kept? A: If we can’t or won’t go deeper into debt, the debt-based monetary and economic systems will implode. Once people realize that the government’s promise to pay the National Debt is just as improbable as my promise to give each reader $1 trillion, the system will begin to collapse.

7. The debt-based monetary system is a Ponzi scheme. Like any other Ponzi scheme, the debt-based monetary and economic systems will collapse whenever they can’t find enough new debtors to keep the scheme running. That collapse is inevitable. It’s built in to the nature of any Ponzi scheme. The only question is When?
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• Q: Why would people lose confidence in the payment of the National Debt?

A: As I’ve said for years, “What can’t be paid, won’t be paid.”

In other words, if people consider the sheer magnitude of the “official” National Debt ($20 trillion) and divide it by the U.S. population (320 million) they’ll see that each American’s “fair share” of the National Debt is over $60,000. The “fair share” of the National Debt for a family of four would $250,000.

The vast majority of Americans don’t have an extra $60,000 in assets for themselves and for each member of their family. Therefore, the National Debt/ National Promise, won’t be paid.

Ohh, it’s remotely possible that our $20 trillion National Debt might be paid over a period of, say, ten years of “austerity” wherein we paid an extra $6,000 per year to Uncle Sam for ourselves and another $6,000 for each member of our family ($24,000/year for a family of four). But, can you imagine the average family of four paying another $24,000 in debt each year for the next ten years? I won’t say it couldn’t be done. But I will say it’s not ever going to happen. And, even if it did happen, our determination to endure ten years of austerity would only eliminate the National Debt if government didn’t go any deeper into debt during those ten years—and y’know that’s not going to happen

Implication: Any public confidence that the $20 trillion National Debt will be paid in full is delusional. It ain’t gonna happen.

And what if john Williams (shadowstats.com) is right and the National Debt is actually about $100 trillion ($300,000/person; $1.2 million/family of four)? There’s no doubt that that debt/promise will never be paid/kept.

Then there’s estimates from the Congressional Budget Office and economist Laurence Kotlikoff that, including unfunded liabilities (more promises), the National Debt is really over $200 trillion. That’s $600,000/person; $2.4 million/family of four. Those debts, those promises to pay, will never, ever be paid in full.

The National Debt is impossible to pay. Government can’t keep it’s promises. That means that public confidence in the debt-based monetary system is unwarranted and absurd. Sooner or later, the public will face that truth. When it happens, the whole system—not just in the U.S. but globally—will collapse.

Hard to say what will happen then, but it’s not unreasonable to suppose that, globally, millions, maybe hundreds of millions of people might die in a global “Venezuela”.

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• The systemic problem with the Japanese, U.S. and global economies will almost certainly remain unresolved until the debt-based monetary system and debt-based economies are abandoned or fundamentally modified.

Why unresolved?

Because debt-based currency is the world’s central banks’ only product. Central banks aren’t about to admit that our impending economic doom is primarily based on the debt-based currency that they produce. To make that admission is to confess that the world’s primary economic problems won’t be cured until the debt-based monetary system and its primary source (the central banks) are eliminated.

There’s no more reason to expect central banks to confess that debt-based monetary system is depressing the global economy than there is to expect Monsanto will admit that GMO foods cause cancer. Such admissions are contrary to their interests.

So long as the world’s central bank economists can’t or won’t admit that the source of our economic malaise is the debt-based monetary system, there’ll be no solution to our economic problems. Those problems will only get bigger until, one day, burden finally becomes unsustainable and the whole system implodes like the Weimar Republic, Zimbabwe or perhaps Venezuela.

Promises, promises. Easily made. Easily broken. The American people have made too many private promises. The governments of the world have made too many public promises. These promises can’t be kept and must be broken.

We’re already seeing broken promises in pension funds. Soon, we’ll see more broken promises in subsidies, welfare, and government benefits. Ultimately, we’ll see broken promises in U.S. bonds. When promises/debts of the U.S. bonds are shown to be broken, the whole debt-based monetary and economic system will collapse. Almost everyone will suffer. Some may die. It won’t be fun for anyone.