“Reset” Coming? What’s a “Reset”?

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Greg Hunter (USAwatchdog.com) recently interviewed Rob Kirby (Kirby Analytics) in a 30-minute video. During the interview, Kirby predicted a coming economic and/or monetary “reset”.

According to Kirby,

“Today, we see China, Russia, India and others are moving to protect themselves from the systemic risk of the over-printed dollar. It’s become clear to many that the dollar’s world-reserve-currency status cannot last. It’s just a matter of time before the entire currency system will face a radical reset reflecting today’s reality.”

A “radical reset” is coming. Sounds kinda scary. But, what, exactly, is a “reset”?

Kirby continued:

“Two payment platforms have dominated large-scale settlements in international trade; the European-based SWIFT system and the US’ Clearinghouse Interbank Payment System (CHIPS). China has recently launched its own platform, the Chinese Interbank System (CIPS), which may soon merge with SWIFT.”

“My gut tells me that this will marginalize America as the main processor of global payments . . . this will embody a total reset, as to which currency will be the reserve currency. I suspect that when China merges their CIPS with the SWIFT system, that they will also back their currency with gold.”

Note that Kirby defines that “total reset” in terms of deciding which currency will be the World Reserve Currency—U.S. dollars or Chinese yuan.

I agree that changing the world’s primary reserve currency from fiat dollars to gold-backed yuan would constitute a kind of “reset”. If that happened, the value (purchasing power) of the dollar would certainly fall.

Given the opportunity to transact business in a gold-backed yuan, much of the world would flee from fiat dollars and run to do business in gold-backed yuan. The fiat dollar would be quickly devalued (inflated) and perhaps even destroyed.

But, wouldn’t destruction of the fiat dollar be viewed as an act of war?

Back about A.D. 2000, Saddam Hussein threatened the fiat dollar’s global hegemony by selling Iraq’s crude oil for euros rather than dollars. We invaded and destroyed Iraq and hanged Hussein.

About A.D. 2010, Libya’s Colonel Qaddafi tried to establish a gold-based currency for Africa. Led by the U.S., the West invaded and destroyed Libya and murdered Qaddafi.

The lesson seems clear. Threatening the fiat monetary system is serious business that can cause nations to be invaded and leaders to die.

Therefore, we can legitimately ask, “Would the U.S. government allow China to threaten the fiat dollar without going to war?”

As you’ll read, the answer to that question, might be Yes

CUTTING THE NATIONAL DEBT

The fiat dollar and National Debt are both dangerous problems. However, I suspect that government’s primary problem is less the fiat dollar—and more the National Debt. If the fiat dollar died and the National Debt remained, the government would still be in deep do-do. But if the National Debt could be eliminated—even if it also meant killing the fiat dollar—the government might be rejuvenated.

I.e., the existing National Debt is too great to ever be repaid. It follows that any new debt is even less likely to be repaid. The probability that new debt won’t be repaid inhibits new creditors from buying more U.S. bonds and lending more currency to the government. Without more, new loans, government will be forced to either cut benefits or raise taxes. Either way, voters scream.

But if the National Debt could be cut by 50% to 90%, creditors would once again trust the government to repay its new debts and therefore be willing to extend new loans to Uncle Sam. With a revitalized stream of credit, government could continue to provide substantial benefits without raising taxes . . . . and the voters would say, “Yaaay!” and they’d love their politicians and reelect the incumbents—which, from the politicians’ perspective, is what “good government” is all about.

HOW TO REPUDIATE

Given that the existing National Debt is already too great to ever be repaid in full and is therefore restricting government’s ability to borrow more, government should welcome any tactic that reduced the size (purchasing power) of the National Debt by, say, 50% to 90%.

For example, the President could step up to the microphone and expressly declare that Social Security, welfare, subsidy and government pension payments would be reduced by 50% or even terminated. That’s an “express repudiation” of debt. It’s like pulling a bandage off a wound. It’s quick but painful. The result would be much political screaming and chaos.

A second, stealthier way to repudiate debt is by hyperinflation. It’s not as instantaneous, obvious or immediately painful as “express repudiation”. Plus, since most people don’t really understand hyperinflation, government could blame hyperinflation on other governments or institutions. The public might be angered by hyperinflation, but they’d also be confused and therefore less likely to riot or lynch the politicians.

Therefore, I believe that government would rather sacrifice the fiat dollar to hyperinflation—if doing so would destroy most of the National Debt—than engage in
express repudiation.

Either way (by means of hyperinflation or by means of express repudiation), I suspect that government’s object is to allow government to go deeper into “new” debt. I’m saying that government may seek to eliminate old debt in order to go into new debt.

Yes, I know that sounds like an absurd hypothesis, but remember that:

1. We have a debt-based currency; and,
2. We live in a debt-based economy.
3. The U.S. and global economies run on debt.
4. It’s at least possible that if we can’t or won’t go deeper into new debt, our debt-based economy could collapse. I.e., we need more debt to fuel our debt-based economies.

So, it’s not completely irrational to suggest that, if the existing National Debt is so great that it can’t be repaid and therefore creditors won’t lend any more currency to government, then the existing debt must be repudiated sufficiently to restore creditor confidence and allow government to borrow more funds and create more new debt.

WHY “NEW” DEBT?

Why go into “new” debt? What’s wrong with the “old” debt?

I don’t know, but I’m going to speculate that, under fractional reserve banking, each new debt creates a new, paper debt-instrument that can be stored in a bank vault and used as new collateral to justify lending more credit to the the public. Under fractional reserve banking, banks can lend nine dollars in credit to the public for each dollar it holds as a debt-instrument (collateral) in the bank’s vault. The more debt-instruments held in its vault, the more credit the bank can lend to the public. The economy is “stimulated” by the easy credit based on new debt instruments deposited into bank vaults. Fractional reserve banking creates a need for new debt-instruments (collateral) and thus a need for new debt

“Old” debt, on the other hand, is no longer taking advantage of the 9X multiplier found in fractional reserve banking. “Old” debt created “9X” economic stimulation when it was new, but does not create more “stimulation” as it ages.

Under fractional reserve banking, new debt is stimulating. Old debt is burdensome. To stimulate our debt-based economy with the 9X multiplier found in fractional reserve banking, you need to first create more new debt.

So far as I can see,the 9X multiplier is a one-shot phenomenon that only applies to a debt when it’s brand new.

New debt provides a 9X “bang for your buck”.  Old debt is simply a burden.  Thus, there should be incentive to simultaneously: 1) repudiate old debt; and 2) go deeper into new debt.

WE’RE HERE TO HELP YOU!

Interestingly, since the Great Recession of A.D. 2008, government has lowered interest rates to near zero (ZIRP) and engaged in massive currency printing (QE) in hopes of getting the public to borrow, create more debt, create more debt-instruments to be used as bank collateral and thereby stimulate the economy. That strategy hasn’t worked very well. The public has generally refused to plunge deeper into the new debt that would ultimately “stimulate” our economy.

Government picked up the slack by going so deeply into new debt that the National Debt doubled in the past seven years. You’d suppose that an additional $10 trillion in National Debt would be enough to stimulate our economy back into a recovery. But it hasn’t.

The problem, now, is that government has gone so deeply into debt (doubled in seven years), that creditors no longer believe government can repay existing debt and therefore won’t lend government more currency. Without access to more credit, government must either cut benefits or raise taxes. In either case, the public will howl and vote incumbents out of office. That, as I’ve already suggested, constitutes “bad government” and won’t be tolerated by our politicians.

To stimulate the economy, government needs to somehow reduce the “old” National Debt enough to allow government to enter into “new” debt.

GOLD-BACKED YUAN CAUSES HYPERINFLATION

All of which suggests that the only civil way to kick-start our debt-based economy is for government to eliminate most of the existing debt so it can create more “fresh” debt and new debt-instruments capable of being used as bank collateral.

I’m not arguing that this hypothesis is true. I’m only saying that it’s interesting and offers a different perspective on why the U.S. might allow (even encourage) China to establish a gold-based yuan.

After all, the fiat dollar (like all other fiat currencies) is doomed to eventually die in a super-nova of hyperinflation. The fiat dollar has already lost over 95% of its value (purchasing power) since A.D. 1971, so how much longer can fiat dollars survive before they lose the last 3% to 5% of their former purchasing power and become completely worthlessness?

Rob Kirby fears that bankers will precipitate WWIII to protect the fiat dollar. But, why go to nuclear war in order to protect a fiat currency that’s already a “dead dollar walking”?

Instead, why not allow China to issue a gold-backed yuan that slowly supplants the fiat dollar as World Reserve Currency? Without World Reserve Currency status, the fiat dollar’s value would slowly slide into hyperinflation, wipe out much of the National Debt, and cause political and economic chaos. That would be bad.

But if it’s all likely to happen anyway in the next few years, so why keep kickin’ the can down the road? Why not face the inevitable and let the dollar die? After all, government could shed some crocodile tears and blame the dollar’s demise on China—and most people would probably fall for that deception. Incumbents could be reelected.

Thus, a gold-backed yuan from China could help the U.S. government evade political liability for a dying fiat dollar. Plus, if a gold-backed yuan helped kill the fiat dollar, the dying dollar would take much of the National Debt with it.

My point is that, rather than initiate a nuclear WWIII, America’s overly-indebted government could achieve a similar result (getting rid of the “old” National Debt so it can go generate “new” debt) if they secretly allowed (even encouraged) China to establish a gold-based yuan. As the yuan slowly became the primary World Reserve Currency it would thereby cause the dollar (and National Debt) to hyperinflate into oblivion.

Yes, yes—I know the whole hypothesis sounds absurd. Even to me. But I can’t get past the facts that we have a debt-based currency and a debt-based economy. Those facts imply that, for some strange reason, we need ever more debt. If so, perhaps my hypothesis isn’t as absurd as it seems.

RESETS ERASE DEBT

All of which brings me back to Rob Kirby’s prediction that a “radical reset” is coming.

It wouldn’t be the first. We’ve had them in the past.

For example, in A.D. 1933 (in the midst of the Great Depression somewhat similar to our Great Recession) when we still had real, gold-backed money, the government caused a “reset” by changing the value of the domestic dollar from $20/ounce of gold to $35/ounce. By doing so, they raised the price of gold by 75%, subjected the paper dollar to 43% inflation/devaluation, and reduced the value of the National Debt (denominated in gold-backed dollars) by 43%. Investors who held US bonds were robbed of 43% of the original value of their investments.

Later, circa A.D. 1970, government raised the price of gold in relation to foreign-held dollars from $35 to $42. Result? An additional 20% inflation—and a 17% reduction in the value of however much of the National Debt (still denominated in gold) that was owed to foreigners.

In both of the two major dollar “resets” of the 20^th century, the dollar’s value in relation to gold was devalued (inflated)—and the National Debt was thereby reduced.

That suggests that a—perhaps the—primary purpose for those two “resets” was to reduce the real purchasing power of the National Debt, rob government’s “old” creditors, and free the government to go deeper into new debt.

When the price of gold was $20/ounce in A.D. 1933, it was easily “reset” to $35/ounce. Later, the $35/ounce price was easily “reset” to $42/ounce. Those “resets” were easy since paper dollars were still backed by law to greater or lesser degree by a fixed quantity of physical gold. With the stroke of a pen the President or Congress could change that arbitrary quantity of gold backing each dollar.

However, in A.D. 1971, President Nixon closed the “gold window” and stopped redeeming foreign-held paper dollars with any amount of physical gold. Since then, the paper dollar has had no legally-defined relationship to physical gold. The fiat dollar became a “unit of account” (like Monopoly Money) rather than a “unit of exchange” (like ounces of gold). The fiat dollar became a “floating” currency with no fixed value. It’s only value is in relation to other fiat currencies that are also “floating” (constantly changing their relative values).

Rob Kirby’s recent definition of “reset” (changing the World Reserve Currency from fiat dollars to Chines yuan) is different from currency “resets” of the past. The essence of that difference is seen in the following question:

“How can you “reset” or change the value of today’s fiat dollar, since it has no fixed value to begin with?”

We can’t reset the value of the dollar from $20 to $35 because there’s no fixed “$20” to begin with. What does the word “reset” mean in a world where the values of all fiat currencies are constantly “floating” and without fixed values?

OK—even if we can’t necessarily define what a modern “reset” might be, we can still look back to A.D. 1933 and A.D. 1970 to see what “resets” did. What did those “resets” do? They reduced the value (purchasing power) of the National Debt.

We can speculate that, if there’s going to be another real “reset”—even if it can’t be achieved by a mandatory change in the value of the fiat dollar—the result will be another significant reduction in the value of the National Debt.

We can therefore argue that, in practice, the modern term “economic reset” means significant repudiation of governmental debt

WWIII

As previously mentioned, Rob Kirby warned of WWIII:

“When banks have nothing else to do, they take us to war. A world war. Are we going to have a nuclear war?”

It’s conceivable that the Powers/Bankers That Be might decide to start a “small” world war that scares people so badly that they willingly dive deeper into debt to defend their lives against their enemies. There’s little in life that creates new debt faster than war.

In fact, if a continuous supply of new debt is essential to sustain our debt-based economy, could that explain why we seem to be embroiled in one “war” (Korea, Viet Nam, Cold War, Iraq I & II, Libya, Syria, War On Terror, etc.) after another? Continuous War For Continuous Peace?

Plus, we never win wars anymore. Our modern wars seem to drag on endlessly without definitive objectives, meaning or victory. They accomplish nothing—other than to increase the National Debt.

Perhaps that increased debt is just coincidental—an unintended consequence of war. Still, given that we live in a debt-based monetary and economic system, maybe our endless wars don’t create more debt by accident. Maybe they’re intended to create more new debt to produce more new debt-instruments to authorize 9X fractional reserve banking to prime the economic pump.

Endless War for Endless Debt for Endless Economic Stimulation?

Is that real reason for war? To increase the National Debt in order to somehow “feed” and stimulate our debt-based monetary and economic systems? I won’t yet say that’s true, but there’s enough circumstantial evidence to suppose it might be true.

If that supposition might be true, it would follow that we could run up our debt by bullying smaller nations like Viet Nam and Iraq but without sustaining any real damage to the United States.

But, today, who’s left for us to fight? Russia? China?

Can we risk nuclear war to go deeper into debt? What’s the point if the result is the destruction of the debt-based economy and infrastructure that the “Powers” are presumably trying to stimulate, control and exploit? What good is the creation of more debt if the cities of New York, Chicago, Houston and Los Angeles are vaporized?

More, how much debt could a nuclear war produce?

Probably not much. Unlike our endless “police” actions in Korea, Viet Nam and Iraq, nuclear world war won’t drag on for months and years. WWIII could start tomorrow at noon and be over before the rush-hour traffic (if any cars survived) started at 5 PM.

To create maximum new debt with minimum destruction, you need a “police action” in some foreign, impoverished jungle or desert that can be dragged on for years. During each of those years, the government could generate more and more debt and debt-instruments usable as bank collateral.

However, a real WWIII could start and end so quickly that the resulting creation of debt would be insignificant while the destruction of life and infrastructure would be horrendous.

If it were true that a primary object to modern warfare is the creation of more debt to feed our debt-based monetary and economic systems, a nuclear WWIII makes no sense since it would destroy both debtors (the great unwashed) and creditors (the banking elite) and produce more craters than debt-instruments.

There’s a conspiracy theory that, for centuries, bankers have fomented small wars to create more debt, more profits and more power for the banks. Perhaps that’s been true in previous wars, since bankers could sit safely on the sidelines while they counted their profits. But, when it comes to nuclear war, that conspiracy theory breaks down since there’ll be no profits, no safe sidelines, and even the bankers might get killed.

Although WWIII is possible, I’d bet against anyone (other than a madman) intentionally starting a nuclear war in hopes of increasing his wealth, power or the world’s debt.

CONCLUSION

There’s going to be another “reset”. However it’s done, the next “reset” will repudiate much of the existing National Debt and/or might create a national emergency that’s sufficiently scary to stampede Americans into going deeper into debt. Either way, the “reset” will allow government to create new debt and new debt-instruments that can be held by banks as collateral under fractional reserve banking to allow the creation of more credit to stimulate the economy.

It’s remotely possible that that “national emergency” might be a WWIII. But it’s more likely that the emergency could be China’s establishment of a gold-backed yuan. I guarantee that a gold-backed yuan could be blamed for creating a national emergency for the U.S..

Of course, our government will shout that it’s “shocked, shocked I tell you!” to discover that the “dirty, treacherous” Chinese would explode our perfectly-fine fiat-dollar Ponzi scheme by issuing a gold-backed yuan.

But would government cry real tears if China issued a gold-backed yuan and the resulting hyperinflation destroyed the fiat dollar and also erased most of the value of the National Debt?

I don’t think so.

Such a “reset” would be messy and painful—but not as painful as a nuclear WWIII.

Plus, for politicians, escaping the National Debt would be cause for celebration. They could go back to borrowing more currency to provide more “benefits and circuses” and economic “stimulation” without raising taxes. They could even hang onto their heads and their cushy jobs.

Such a “reset” would definitely constitute a victory for “good government”.

******************

P.S. There’s one other kind of possible currency “reset”. Government can’t “reset” the value of the fiat dollar in relation to other fiat currencies since no fiat currency has a fixed value to begin with. However, government could “reset” the value of the dollar by declaring each dollar to be worth, and backed by, a fixed mass of gold.

I don’t expect that kind of “reset” to happen soon. But I do expect it to happen. Sooner or later, whatever currency the U.S. uses will go back on the gold standard. That would truly be the most extraordinary “reset”.