by Robert Gore, Straight Line Logic:

The debt dam is crumbling as central bankers and government officials frantically refill the escaping lake with eye droppers.

As background to this article, it would be helpful to read an article I wrote in 2015, “Real Money.”

The foundation of the world financial system is debt. Every currency in the world is debt whose value is not tethered to any real value. In a rare display of official truth-in-packaging, right there on the instrument itself a US dollar bill tells you it’s debt: Federal Reserve Note. A note is a debt. What do holders of Federal Reserve Notes, officially creditors of the Federal Reserve, get for repayment of the debt they hold?

Federal Reserve Notes have no maturity date, pay no interest, and can never be redeemed. If you go to a Federal Reserve branch and try to redeem one, they will either not accept it or they will exchange it for an identical Federal Reserve Note. Why would anyone accept this peculiar instrument? Because you cannot refuse it. Also right there on the dollar bill it says: THIS NOTE IS LEGAL TENDER FOR ALL DEBTS, PUBLIC AND PRIVATE. For American transactions, it’s reject the dollar, go to jail. The American government even levies punitive measures on foreign governments that just say no.

Because central banks and governments can repay their debt with more of their own debt, they have been unconstrained in the amounts they produce. You and I would do the same thing if we were so empowered. Governments, central banks, and debt are a ménage à trois from hell. The US ménage has debased the currency’s value against real goods and services at least 95 percent since the establishment of the central bank in 1913. The ménage’s ill-gotten gains are someone else’s loss—gullible savers and creditors who believe promises by politicians and central bankers that they will not engage in the debasement they have every incentive to promote.

Promoting debt in the public sector, the ménage also seeds it in the private sector. It should surprise no one that central banks tend to favor the politically popular and fiscally friendly (to the government) course of suppressing interest rates below where purely market-determined rates would be.

They are also a ready market for their governments’ debt, a process often mistakenly called monetizing debt. It’s really just an exchange of central bank debt for government debt. If you read “Real Money” you know that no money and consequently, no monetization, is involved. It should be called debtizing debt, but debtize and debtizing are not words. We’ll use them anyway. By having the central bank debtize its debt, the government avoids pushing up interest rates and crowding out private borrowers in the credit market, thus encouraging more private borrowing.

Paying back creditors with a devalued currency benefits all debtors, not just governments and central banks. Forget those hoary old homilies about pennies saved being pennies earned. For older folks, pennies aren’t even worth the lower back pain of picking them up off the floor. Everything governments and central banks do make debtors winners and savers suckers.

If I borrow at 5 percent to fund an investment that returns 10 percent, it’s a productive use of debt. If I borrow at 5 percent to fund a vacation, its economic return is zero percent and I have to repay the debt and interest. Most of the world’s debt is not just unproductive, it’s counterproductive. At positive interest rates debt-funded consumption is always an economic loser, yet most of the world’s debt funds consumption.

There is a school of thought called Modern Monetary Theory (MMT) that essentially says that central banks can debtize their governments’ debt and the governments can then use the central banks’ debt to buy guns, butter, and anything else the populace desires without consequences. It’s like those one simple tricks on the Internet that eliminate fat, wrinkles, baldness, or impotence. It isn’t as if this one simple trick hasn’t been tried and found wanting—repeatedly. See, for instance, Chapter 1, “The Mississippi Scheme,” of Charles Mackay’s classic Extraordinary Popular Delusions and the Madness of Crowds. Nevertheless, MMT is finding its rightful place in college curriculums along with Marxism, Keynesianism, and other economic and philosophical snake oil.

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