Option Millionaires

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Reliance on debt as an economic driver is the other side of the expansion of the total quantity of money. This can only continue so long as people accept that money maintains its objective exchange-value.

Interest Rates

Since the late 1970s the major central banks, led by the Fed, have wrested control of interest rates from markets on the supposition that economic activity and price inflation can be managed by varying them at the state's behest. The policy is very different from the way interest rates are set in free markets. The philosophical bias behind state management of interest rates, that borrowers are more deserving than lenders, has a long history, dating long before Shakespeare's Shylock. Since central banks have controlled interest rates they have always favoured borrowers over savers, with the predictable result that global debt has expanded without the underlying production to support it. And without earnings set aside from production, debt cannot be repaid, so it must default.

Preventing this default has become a growing problem and is the primary task facing central banks. Household, corporate, government and financial sectors are all exposed to debt default, ensuring political and business considerations will allow no alternative outcome. The only means central banks can employ is the creation of yet more money, and to foster the expansion of bank credit at an ever-increasing pace, a remedy that was spectacularly confirmed as effective by the Fed's management of the Lehman crisis and the rounds of quantitative easing that followed. Zero interest rates have ensured that compounding unpaid interest is kept to a minimum, but at the same time they have encouraged yet more unproductive borrowing. Markets are signalling that we are arriving at a new financial crisis, and soon it will be time to unleash the monetary weapon again.

Each crisis is of a greater magnitude than the previous one. The trigger undermining the global debt problem this time is a sharp slowdown in global production. Without the fig-leaf of increasing productive output, the precariousness of the global debt problem has become all too evident to ignore, even for perpetual optimists.

The Inevitable Conclusion

Equity markets are telling us that the debt crisis is now upon us again. The detailed course that events will take from here cannot be predicted, but we can be certain that over the coming months governments will be ready to move heaven and earth to prevent a deepening crisis, by any means at their disposal. In this respect the lesson of the Lehman crisis is that flooding the system with money and guarantees of more money actually works. Gone will be any pretence of monetary discipline, gone will be any pretence of higher interest rates, and gone will be any constraint on the issuance of yet more debt. A crisis of malinvestment has become a crisis of the financial system, and will soon become a crisis of currencies. We can be increasingly certain that debt will be extinguished not by debtors reckoning with creditors, but by the debasement of money, and that this outcome becomes the unstated objective of policy makers.

It is an important conclusion. In effect, it posits that the only solution open to central banks is the deliberate destruction of their own currencies, not on the drip-feed basis that has existed since the Bretton Woods Agreement, but by a more deliberate acceleration. We cannot judge whether this will work one more time, postponing a final crisis. But we can see the circumstances ahead of us more clearly, and we can more easily imagine central bankers being drawn into repeating the mistaken policies of Rudolf Havenstein, president of Germany's Reichsbank in 1921-1923. In predicting this final crisis for any country that treads down the path of government corruption of its money, the economist von Mises described its manifestation as a crack-up boom, the boom to end all booms, when ordinary people finally realise the worthlessness of government currency and dump it as rapidly as possible for anything they can get hold of. The last vestiges of the currency's objective exchange-value evaporate.

The hyperinflation of fiat money and the prospect of a final collapse in its purchasing power is becoming an increasingly probable outcome of the financial events unfolding today. That much can be deduced from sound economic theory, and is confirmed by historical records of similar crises. We can also expect this outcome to be made certain by the misguided faux-science of macroeconomics, which bases itself on the denial of Say's law and which badly misleads government policy-makers.

Only this time the threatened currency destruction will be global, because where the dollar goes, and the dollar is still the reserve currency, so we all go.

https://www.goldmoney.com/research/analysis/economics-of-a-crash?gmrefcode=dollarc