"How Free Money Fails"
by Paul Rosenberg
"You might think that throwing free money into an economy would create a permanent party, but it never quite turns out that way. And I think it’s important to understand why. After all, we’ve been watching a free-money party since 2008, and if it ends, the morning after figures to be deep and dark.
What if They Built a Building and No One Came? One of the primary uses of all the free money since 2008 has been real estate, aka building lots of shiny new buildings. But how many of those buildings do we really need? And what happens when we pass that number, whatever it is? I don’t know what the “don’t need more” number is in my city, but I can make an educated guess that we’re past it. Not that the condos aren’t selling and the offices aren’t filled, you understand... people from the outer areas (mostly young) have moved to the center, filling up the new condos. The suburbs and neighborhoods are withering as a result, but the core still looks golden. But this too can go on for only so long; at some point, the free-money-fueled building craze will go too far and even the shiny core-city will sport vacancy signs. I hear it’s happening already in New York.
Now, it’s true the stock market (another destination for the free money) lacks this kind of connection to reality. Still, a company with an ever-increasing stock price can nonetheless sell less and less stuff, and since some financial types are able to find reality when they look for it, it’s not entirely evaded.
More Debt or Die: What many people don’t understand is that the entire dollar system relies upon ever-increasing debt. (By now, anyone interested should know that central banking is a sham. If you don’t, get a copy of "The Creature From Jekyll Island" and read it. Or if you have an especially strong disposition, get a copy of "Modern Money Mechanics" and get it straight from the horse’s mouth.)
The entire dollar system relies upon debt, and without debt (or credit, if you prefer) there would be no dollars at all. So, when people have no use for ever-more new loans (when they can build a building but not fill it), dollars begin to vanish, sometimes at multiples of 9-to-1 or more. And that means deflation, complete with falling wages. That in turn breaks the implied deals that keep Westerners in their docile compliance. There are alternatives of course; big players could make massive loans to one another and agree to ignore them forever, for example. Or the reserve requirements could be further lowered. These tricks, however, carry complications of their own.
How Debtors Get Ruined: Once a monetary system contracts, prices fall (as do wages!), leaving all those overextended debtors unable to pay their loan balances, which will not drop in concert with wages. After a short while, they'll have no alternative but to liquidate their assets. In other words, they’ll lose their houses, cars, and assorted status symbols. Less money simply cannot serve the same debt load. And so, during times of deflation, assets are transferred from debtor to lender. It’s an old story, but one we haven’t seen much during the era of fiat currency capitalism.
Options: The powers that be have been fighting desperately to forestall the day of reckoning, and for all I know they may continue to succeed. They’ve assiduously protected the stock market and the big corporations, but their near-zero interest rates have also eviscerated the pension funds. At the same time, technology is killing scarcity. That makes it easier to survive on the cheap, but it creates additional deflationary pressures at the same time. (Fewer dollars are required to get the same goods.)
So, what are overlords to do? The politicians of course will want to kick the can forever. They lack almost all capacity for forward thinking, so this makes perfect sense to them. And the money masters? That’s awfully hard to say, since we don’t even know who they are. (Yellen et al are merely public faces; they don’t actually call the shots.) The big bankers could pull the plug if they wanted, or they could help the politicians keep it going... maybe until the Chinese and/or Russians and/or other global players decide to turn against the empire. But this is all speculation. Plebs like you and me aren’t permitted to know what the currency lords do in their back rooms. And so we wait. Or perhaps, if we’re brave, we get busy building a decentralized economy.”