The Logic of Paper Money, Debt, and Gold

Two red-shouldered hawks are nesting in our backyard along with several squirrels. Hawks hunt squirrels – death from above via flying predators.

Conclusion: We will soon have fewer squirrels.

Politicians get elected by telling people what they want to hear. Politicians are (usually) funded by large corporate interests, particularly the banking industry and military contractors. It takes $ billions to buy a Presidential election. Large corporate interests expect favorable access and legislation as a result of their huge contributions.

Conclusion: Politicians tell voters what they want to hear but do what they must to repay contributors and solicit money to win the next election. Promises to voters become collateral damage.

Bonds rise in price as the yield falls. Over $7 Trillion in sovereign debt currently “yields” negative interest. The bond purchaser lends currency to an insolvent government and pays for the privilege, even though the government has assured the lender that the bond will be repaid in devalued currency units. This is clearly a bubble. Bubbles always pop, though predicting when is difficult.

Conclusion: $Trillions of paper “wealth” will vanish when the bond bubble implodes.

Central banks want debt based currencies because they are easily created. Consequently the currency in circulation and total debt drastically increase and prices follow, sooner or later. Compare the cost of medical care, college tuition, an ounce of gold, a gallon of gas, a six-pack of beer, or a week’s groceries today versus the cost for the same items in 1971. Massive debt, caused by politicians and bankers, also acts as a drag on economic growth. To create more growth the conventional answer is stimulus and more debt, which, at best, delays and aggravates the excess indebtedness problem. Bad policy produces bad results.

Conclusion: Expect higher prices for almost everything you need to live. Deflation in some asset prices and consumer price inflation can occur simultaneously. Stocks and bonds can deflate while food costs increase.

Fort Knox officially holds 147 million ounces of gold, worth at current prices somewhat less than $200 billion. Pretend the gold actually exists and has not been sold, pledged, hypothecated, or shipped elsewhere. The value of that gold is consumed via deficit spending approximately every two months.

Conclusion: Even if the gold exists and is unencumbered, it hardly matters in the face of $19 trillion in debt. Expect the debt to eventually default – either by inflation or outright repudiation.

Pension plans in the western world depend upon adequate contributions plus portfolio earnings. In the United States many cities and states are underfunding their pension plans by reducing their contributions. Further, central bank created near zero interest rates are destroying expected returns on bond portfolios. The underfunding problem is increasing both in scope and depth in US cities and states.

Conclusion: The pension funding problem will become far worse. Some pension promises will default. Others will be fulfilled with drastically devalued currencies.

Death from above: Politicians and bankers, like hawks, are often predators that view the populace as a source for their needs.

Survival down below: We need protection from predators. We also need insurance to preserve our purchasing power from devaluing currencies, failing pension promises, and consumer price inflation.

Gold and silver come to mind.

Gary Christenson

The Deviant Investor

9 thoughts on “The Logic of Paper Money, Debt, and Gold

  1. Debt and paper money are not really the problem. The real problem is the widespread expectation to be able to consume more than one produces. Some politicians will defend that right by saying “America is exceptional”. We are born with the right to consume more than we produce because we are Americans. Right now the possibility of a nuclear war with Russia and China is being seriously considered in order to secure that right into the indefinite future. Indeed, if Russia and China submit to US political leadership (including US monetary policy), then debt levels will continue to rise without limits. Gold accumulation will be prohibited worldwide after the US prevails against Russia and China. And Americans will continue to consume more than they produce for centuries to come. Because America is exceptional.

    • Good points, but debt and paper money easily allow us to consume more than we produce. Debt brings future consumption into the present and paper money is printed to create purchasing power that might not have been there – all at the expense of mixed market signals, devaluing currencies, and growth of the financial industry and govt.

      The Deviant Investor

  2. You are right on and the insanity of all this is that anyone with an ounce of common sense, including politicians, know this to be true and yet they continue on making matters worse for our economy. These are times for people to wake up and pray for some wisdom. The only ones who will escape the soup lines will be those who had the insight to buy gold and silver coins or bars. It’s sad, but in my community I don’t know anyone who has a clue even though I’ve shouted it from the roof tops.

  3. Yes, I like silver. My guess is that silver is on the way (back) to $45 per ounce.
    I sold my silver about 2 years ago when silver was $45 per ounce. Now it is below $20 per ounce. So, I am replenishing my supply. Seems timely to do so.

  4. Good post, Gary…..debt is viewed as money until its not so much at a point in time……that time is getting closer no doubt.
    the next decade will be very tough for paper.
    the ability of people to delude themselves never ceases to amaze me.
    but this maximizing our daily situation to our future detriment by us homo sapiens has been going on for a hundred centuries, and is not likely to change.
    Marx has been proven to be wrong……now Keynes will be also….
    cycles are a part of all nature…….and regardless of what the ‘progressives’ think, we are part of that nature…..just consider it as ‘natural’…..imagine that!….and i am glad for it.
    Silly humans…..

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