May 11, 2017    10 minute read

The Ugly Truth about Money

Dismal Future    May 11, 2017    10 minute read

The Ugly Truth about Money

Money, as it is known, is no longer. Its value erodes with each passing day. Central banks around the world print money without the necessary reserves to back their currency. This practice is temporarily calming and conveniently called “quantitative easing” as in “easing the pain in a failing economy”.

The Fed

The most powerful and influential central bank is the Federal Reserve Bank of the United States.

Contrary to popular belief the “Fed”, as it’s commonly known, is not a fully-fledged government institution or department but a privately- owned American company protected by a US government mandate.

The twelve regional Federal Reserve Banks were established as the operating arms of the nation’s central banking system. They are organised much like private corporations, possibly leading to some confusion about ownership. The Federal Reserve Banks have an intermediate legal status, with some features of private corporations and some features of public federal agencies.

Regarding the structural relationship between the twelve Federal Reserve banks and the various commercial (member) banks, political science professor Michael D. Reagan has written that:

“… the “ownership” of the Reserve Banks by the commercial banks is symbolic; they do not exercise the proprietary control associated with the concept of ownership nor share, beyond the statutory dividend, in Reserve Bank “profits.” … Bank ownership and election at the base are therefore devoid of substantive significance, despite the superficial appearance of private bank control that the formal arrangement creates.”

The Fed’s shareholders are unknown to the general public and veiled in a web of secrecy as there are no public records, audits or any information whatsoever about its shareholdings and daily runnings except for what is released to the mainstream media via official reports and public speeches.

The most important decision regularly released by the current chair, Janet Yellen, is either an announcement or indication of the interest rate rise or decline that affects the United States and the global economy as a whole.

Speculation abounds, and global markets move by the mere mention of a possible interest rate change. Evidently, long gone is the gold standard that once instilled confidence in the value of currency.

Central Banks $25trn in Assets

According to recent reports, central banks now own an astronomical $25trn of financial assets.

The concentration of financial assets on such a massive scale in the custody of a few central banks is worrisome, to say the least.

A repeat of the global financial and economic crisis in 2007/2008 could have devastating consequences for the world economy and in particular the trust in fiat money.

Capital vs. Debt

The global economy, to make things simple, is based on supply and demand of goods and services and the medium of exchange is capital and debt. Without going too deep into the merits of this simplified description of the global economy, it suffices to know that there is a great imbalance in the global economy.

There are trade deficits and surpluses between countries and economies around the world and Central Banks (of the most important industrialised nations) dictate economic policies, interest rates and keep inflation at around 2% per annum.

Governments, treasuries and central banks of the most important industrialised nations around the world are essentially carrying out a balancing act to try to keep a healthy economy that grows moderately without too much inflation.

In the process, government debt is bought and sold on the international markets and many countries around the world hold sizeable foreign reserves. China, for example, has the biggest foreign reserves of US dollars outside of the US.

This can be good or bad for the global economy, depending on the exchange rate of the currency being held. And in the case of China, which has a trade surplus with the United States, the Chinese PBC (People’s Bank of China) is accused by the US of manipulating its own currency by keeping the exchange rate artificially low.

Equity and debt are the main financial instruments traded on the financial markets around the world. For some, equities provide the biggest return on capital employed, while for others debt is more secure and considered “fixed income”.

Government debt in the form of bonds are widely traded around the world and “US Treasuries”, “UK Gilts” are “German Bund” considered the safest government debt because as long as the global economy remains stable and balanced, there is a government guarantee that the issued debt will be repaid. This guarantee is even convincing enough that governments issue “perpetual bonds”, which simply roll-over as soon as they expire.

As cash is in short supply in many industrialised countries, quantitative easing ensures there is enough money supply to keep the global economy going.

The ECB is the biggest actor in the balancing act and has committed itself to buying up debt in the form of bonds at a staggering € 80 billion per month. ECB Chairman Mario Draghi calls it the “Economic Bazooka” meaning that the ECB will do whatever it takes to stimulate the economy across Europe and try to keep the stability of the failing Euro.

Debt Multiplies

Those who have the least, pay the most: according to recent articles in Forbes and Bloomberg, the US student loan debt has soared to $ 1.3 trillion, surpassing credit card debt and auto loans.

There is a whole “debt” industry, financial companies buying and selling consolidated debt “cents on the dollar”. Credit companies allow the transfer of debt from one credit card to another. The question is why would anyone buy or sell debt? And the answer is very simple: because debt pays.

Firstly, outrageous interest rates are charged on “unsecured” loans such as student loans, credit cards and especially for “payday” loans, where interest is charged anywhere from 1% per day to well over a predatory APR 1000% (or even a multiple thereof), depending on one’s credit status, default rate and other varying factors. “Payday” loans have some of the highest interest charges in the industry, but the default rate is very high as well.

Secondly, exorbitant late fee charges, penalties and legal fees can increase any debt by a multitude. Small debts can become enormous and the debtor finds themselves in a never-ending debt spiral with a ruined personal credit rating or even black-listed. Thirdly, debt can be sold on internal and secondary markets at “cents on the dollar”.

Even though there are losses, part of the loan portfolio is recuperated through these debt transactions. So what appears at first to be a complicated and unrewarding business model is actually a very profitable business proposition for the party on the receiving end.

Money Makes Money

To make money, one needs money.

When starting a business or any kind of venture for that matter, everyone will need start or seed capital, depending on the financial requirements or capital outlay for the specific business or venture that one wishes to start. If capital is readily available, making a success of anything can appear very easy and may result in the temptation to overspend.

Governments Behave in the Same Way

When money is needed for whatever reason, governments can simply tax more, reduce spending, issue bonds, devalue their national currency or simply print more money. The latter three are the most difficult as any “manipulation” of money erodes public confidence and can destabilise a currency beyond remedy.

Recently, countries like Zimbabwe, Argentina and Russia have faced serious hyperinflation (very high and accelerating rates of inflation) resulting in severe economic crises that takes years, or even decades, to overcome.

The International Monetary Fund (IMF) is an organisation of 189 countries, working to foster global monetary cooperation, secure financial stability, facilitate international trade, promote high employment and sustainable economic growth, and reduce poverty around the world.

Crypto Currencies

Bitcoin is the most known cryptocurrency based on the Blockchain technology (distributed ledger). And although there is much media coverage over both, the adoption has been less than expected.

The thought of a peer-to-peer currency such as “Bitcoin”, which is neither tangible nor physical, and is not governed by a central bank or government has raised doubts about the intrinsic value of this new currency alongside its risk of manipulation or even cyber attack.

High volatility and some recent hacking and market manipulation scandals have had a serious impact on the viability of the many new cryptocurrencies that are being introduced recently around the world. Until the mainstream adoption of Bitcoin is a reality, millennials will stick to cash and their credit cards.

Cashless Societies

In most countries around the world, “cash is still king”.

Sweden is the most progressive cashless country in the world, more than 90% of payments are transacted using credit cards. There are even signs saying “cash not accepted” posted on the doors and storefront windows of shops, bars and restaurants across the country.

In Norway, one’s credit card serves as an official ID as a picture and personal details are typically printed on the back. Even in developed countries such as  Germany, Japan and the United States, which are seriously considering becoming cashless in the near future, cash still rules supreme.

Economic factors such as the untaxed “black” money and crime’s “dirty” money contribute to the global economy. However, this illegal and untaxed money is not accounted for in official government statistics and therefore its economic indicators are untraceable.

India’s recent fiasco to curb the circulation of “black” money (in particular the distribution of large bank notes) did not yield the desired results except for very long queues at banks of ordinary people wanting to deposit or withdraw their money.

Achieving a truly global cashless society across the world will require comprehensive cooperation between governments, central banks, the UN, IMF and the World Bank. The objective will require a lot of time and effort from all governments concerned and the viability of a cashless society will by no means be guaranteed.

Gold, silver, diamonds and other “stores of value”, even plain white rice (used as payment in the past and present), could resurface as alternative ways to pay or transfer value from one to another.

The End of Money

There are many predictions as to when money will disappear and cease to exist as a form of payment or exchange of value, however, there is no certainty and many hurdles will have to be overcome to make a cashless society a reality.

The absolute biggest hurdle and global challenge will be the ever-increasing debt situation of most industrialised countries. Even emerging economies are faced with crippling government debt and recently economic powerhouses like Norway and Saudi Arabia, whose economies are dependent on oil, have joined the fray of indebted countries with budget deficits.

In “out-of-control” debt spirals, such as the United States ($20trn) and Japan ($11trn), interest compounding can have devastating effects as the mountain of debt grows incessantly and can never be paid back. So the solution adopted by many governments and central banks is just to print more money, issue bond “buy-back” programs (ECB, US Treasury and Federal Reserve Bank) and issue perpetual bonds.

However, this fragile and unsustainable balancing act cannot go on forever. One day, there will have to be a “global reset” of all debts agreed by all governments around the world. Many will argue that such a drastic measure will not be possible, but it seems inevitable.

The main reason is that the compounding effect of perpetual bonds and interests will reach an inflection point, which cannot be overcome without a global solution agreed upon by all governments worldwide.

Then What?

Debt forgiveness and nullification will not be easily accepted by countries that enjoy a surplus government budget and the primary reaction by the global financial markets will be a complete collapse of equity values and destabilisation of major currencies around the world.

A dystopian world will then have to be ready to accept the consequences of a total global economic and financial meltdown that will result in many conflicts and wars across the globe. And it will be ugly.

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