Of all the many signals of economic breakdown across the world today, there is one that stands out. This signal is the markets' designation of the debt paper issued by governments
as THE "safe haven" investment. The danger of this assumption is that there is no "investment" anywhere on any market which is as far removed from the production of REAL
WEALTH as "sovereign debt". There is no investment as pernicious to real wealth and the capability of producing it as government debt paper.
Any debt, of any nature, is an unfinished transaction. The debtor receives something of value without immediately surrendering anything in return. Instead, he promises to repay
the debt in full at some designated point in the future. Before that point is reached, the debtor must gradually repay the principal while also paying a rate of interest to compensate the
lender for the fact that he must wait for full repayment. In order to repay the debt in full, including all contracted interest payments, the debtor must create new wealth. In the absence
of this wealth creation, the loan can only be extinguished by the debtor dipping into his existing wealth. If the existing wealth is insufficient, the debt cannot be repaid at all.
To maximise the chances of the debt being repaid, the safest form of loan is one made for a PRODUCTIVE purpose. The most obvious example is a borrower who uses the loan to
invest in the capital goods necessary to increase production or to bring a brand new form of production into existence. Loans for the purpose of consumption are much more risky since
they are not invested in the means of wealth production. They are a drag on the future wealth creation of the borrower.
But loans made to governments are in a different league altogether from loans made for production or consumption. A government has no capacity to create wealth. NONE. What
government DOES have the capacity to do is to expropriate wealth from those who create it and to create "money". The first power creates the illusion that governments can generate wealth. The second power creates the illusion that governments can "repay" their debts. So they can, but these two illusions have hidden the economic carnage that is a direct result of government wielding their power OVER the economy.
A "Sovereign" Remedy:
In the private economy, the wherewithal to service and repay a loan cannot be expropriated or created out of thin air. That being the case, there is always a chance that the loan will go
sour and some or all of it will NOT be repaid. Because of this, people who buy the debt obligations of private individuals or corporations look upon them as having an
unavoidable risk attached. The risk itself can never be eradicated for the simple reason that the future is uncertain. The perceived level of the unavoidable risk is indicated by the
interest rate payable on the loan. The higher the risk and/or the more untested the borrower, the higher the rate will tend to be. A track record of repaying previous loans counts for a lot.
There is one borrower in the markets with a perfect track record. That is the government. Loans made to governments will always be repaid because the government can tax and
print money. In the private sector, lenders rely on the wealth- generating capacity of their clients when they issue loans. In the "market" for government debt, the lenders count on the
exact opposite. They count on the wealth-destroying capacity of their "clients" to get paid.
Allow us to repeat that. The panicking investors who are piling into a very select group of sovereign debt issuers "count on the wealth-destroying capacity of their clients' to
get paid". They have always done this, of course. The difference today is that this wealth-destroying capacity has been on show for the past five years like never before in history. When the only professed hope left for a resumption of economic "growth" is higher and ever higher levels of government borrowing, one can be confident that real wealth is under siege. A glance across the global economy will show you that this is indeed the case.
Any "sovereign" remedy for an ailing economy is guaranteed to kill it. That is what is now happening.
Government Debt With Monetary Discipline:
The tradition of holding the debt paper of government goes back a long way. In the early days of the nineteenth century in Great Britain, the attitude of the "higher classes" to those who earned their living from being in what was called "trade" was still one of amused contempt. Among the aristocracy and the "educated", an income was not derived from efforts in the
marketplace, it was derived from the interest earned on existing capital. A man "had" an income of 100 or 500 or 1000 or 10,000 pounds a year. That was the interest earned on investments. And by far the biggest source of this interest was the sovereign debt of the government, which were known as "gilts". "Gilts" and the income earned from them was the major factor in the "upper classes" in the UK continuing to look down their noses at those who had to scrabble for a living in the marts of trade.
For most of the nineteenth century in Britain - and in the US - the purchasing power of money was comparatively stable - remarkably so by today's standards. For the last four decades
of the century, the purchasing power of money was actually gradually increasing. By the modern definition of the term, this was a "deflationary" era. It was also the era of the
greatest wealth creation in the history of the world. The combination of a money with stable or even increasing purchasing power and the perceived safety of an income guaranteed by government was a powerful attraction. In such circumstances, few worried about the interest rate or rate of return on their investments because they were confident in the purchasing power of the money. As long as the capital remained intact, they saw their future as secure.
The capital remained intact because the money had a direct link to gold. The amount of sovereign debt remained stable too. In the US, for example, the civil war took place in the
years 1861-65. Between 1860 and 1866, US government debt exploded from $US 64.8 million (yes - "million") to $US 2.773 Billion. Government debt did not exceed that 1866 total
until 1912 - 46 years or two generations later. Over that entire period, US government debt did not increase by ONE PENNY. Is it any wonder that the period between the end of the civil was
and the start of WWI was by far the biggest period of wealth creation in one nation in the history of the world?
Remove The Discipline And All Bets Are Off:
Compare the record of the US government in the 46 years between 1866 and 1912 with any similar period since 1913 - the year when the US introduced an income tax AND a central
bank. Take the 46 years from 1966 to date as an example. Over that period, the equivalent "funded" US government debt total has climbed from $US 330 Billion to $US 15,800
Billion. Between 1866 and 1912, the population of the US increased from 38 million to 95 million - a rise of 150 percent. Between 1966 and 2012, the population increased from 195
million to 313 million - a rise of 37.7 percent. Population growth over the first era was almost exactly four times what it has been over the most recent era. In the era between 1866
and 1912, government debt did not contribute one penny to "economic growth". In the era between 1966 and the present, it contributed $US 15,470 Billion to it. And almost ALL of
this MASSIVE debt accumulation since 1966 - 99.5 percent of it to be exact - has come since the remaining shreds of a link to Gold as money were removed in August 1971.
Which was the real era of a "stable currency", the supposed goal of the Federal Reserve and all other central banks? Which was the real era of economic growth in the true meaning of the phrase? Was it the era when wealth creation or the era when the creation of money backed by the taxing power of government went into orbit? And what type of future are all those who now flock to US Treasury debt paper as their ultimate form of "safety" guaranteeing for the
An investment in government debt is an investment in the future power of government to drain an economy of ever more of its means of creating real wealth. As Franz Pick put it, it is an investment in "guaranteed future confiscation". When Dr Pick said that in the early 1970s, the confiscation was still in the future. That is no longer the case today.
US and the world over the NEXT 46 years??
.Ó 2009 – The Privateer
(reproduced with permission)
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