Paper Money

The Deadly Dance of Paper Money and Modern State

In our times, a modern state exists on an ever more fragile base. Its foundation resides on its ability to borrow money continuously and irrevocably. Thus, a modern state today is but a mere slave of fiat currency, a canary stuck in the cage of paper money. Greece is the perfect example of a state that had stretched its borrowing capabilities too far.

The Banks are selling credit at lower and lower prices today and with increasingly creative tactics too. However, wrapped inside the ease and convenience of this credit lies the thorns of reality. Falling interest rates ultimately lead to currency devaluation. Thus, with falling interest rates in the US for more than 35 years now, fiat currency faces the ultimate question that had disturbed economists for years. Was detaching Gold from the monetary system a good idea?

When fiat paper money was introduced in 1971, Interest rates in the US were 6%.  As the Feds cut the connection between Gold and Fiat currency, Interest rates soar to 21.5% in order to control the exuberant inflation this act had induced in the economy. Now, many years later, we suffer the consequences of this measure.

Falling rates and the destruction of wealth

Although a fall in interest rates is seen as a sign of good economic growth in the short term, the long-term effects of cheap credit are often overlooked.

As with the US, continually falling interest rates show that the required balance between debt and available credit is heavily tilted to one side. Essentially, this balance is what sustains the growth of an economy and if it is tampered with, fatal consequences prevail.

Professor Antal E Fekete explained the dangerous consequences of a long-term trend of falling interest rates in these words:

“…a falling interest-rate structure has a deleterious effect on accumulated capital. Capital is destroyed across the board simultaneously and stealthily. By the time the damage is discovered, it is too late to do anything about it and firms go bankrupt in droves. The falling trend of interest rates is the unrecognized cause of the depression that is presently devastating the world economy.”

“…The last vestiges of the gold standard were unilaterally discarded by the government of the United States in 1971. This event was coincident with the onset of the greatest gyration in the rate of interest on a worldwide scale. In a decade interest rates shot up to two-digit figures in the high teens. Then a slow decline started in the 1980’s pushing interest rates relentlessly towards zero.  The  first  move  (rising  interest  rates)  was accompanied  with  a  great  surge  of  inflation,  wiping  out  a  large  part  of  the  value  of  pension  rights.  The second  move  (falling  interest  rates),  which  is  still  continuing,  has  brought  deflation.  It has not yet fully manifested its corrosive on the pension funds yet. Even so, the forces that drive the rate of interest to zero are squarely responsible for the erosion or destruction of all capital.”

Down the Wealth Destruction Curve

A combined view of the money supply curve and the long-term interest rate chart can easily explain the relation between paper money and wealth destruction.

A constantly increasing money supply from the government decreases the dollar’s buying power with every passing day. Those of us who save our assets in cash are quickly sinking into the quicksand of a devaluing dollar.

The Great depression had always been foreseen by experts who understood the devastation fiat currency could do. Today’s scenario is far more serious in nature. Barely out of the last recession’s deathly grip, are we on the verge of collapse again? With no gold to support paper money’s value, there is little hope of avoiding any future cataclysmic currency crisis.

Before the last financial crisis, interest rates were in the range of 5-6%. Today, to provide artificially liquidity, Fed keeps the rate near the zero range in a false hope to save the Economy.  The same goes for other industrialized nations who follow the US’s lead in dropping interest rates to save economic growth. But all is in vain.

These low interest rates coupled with excessive lumps of money in the form of dollar bonds serve no other purpose than to push global markets into yet another roller coaster ride. This newfound money will only devalue currency further and ultimately destroy its buying power.

This is so typical of any capitalist society. Here, capital ultimately accumulates into financial markets forming bubbles that collapse to the dismay of many.

The current financial situation is akin to the conditions after the 1930s financial collapse. As global demand for goods decreased, countries aimed for even the smallest market share. They reduced tariffs in order to make a sale. The Smoot-Hawley Tariff was one act that imposed heavy surcharges on the import of several good in an attempt to discourage imports and revive the domestic markets. This resulted in even more stress within global markets and only worked to make the crisis worse.

2009 saw the same kind of steep decrease in international demand. This time the government tried to increase exports by debasing currency. Inducing a large amount of fiat currency into the economy at a time of distress can only be understood by the Chinese proverb that goes “Drinking poison to quench thirst”.

The jolly effects of excessive money printing are only temporary in nature and carry with them disastrous consequences. The ultimate result will be another collapse in the financial markets and the devaluation of currency further.


Gold – the ultimate option to save your wealth

Paper money’s collapse is evident. Gold’s inherent value as a currency can never be denied.

With chaos in the financial markets, Gold is the only safe Haven investment that will save people’s wealth. Gold is stable when conditions are such and volatile when the market suffers the consequences of a weak monetary policy. Gold’s inflation protected value gives you the satisfaction that it is indeed the ultimate store of wealth that serves to protect it no matter what the fiat currency is going through.

Buy Gold, Buy silver and relax.