Silver Linings When A Currency Dies

The global economy seems to be on a one way path to eventual destruction as interest continues to accumulate on the massive word-wide debt.

Budget and trade deficits keep growing, but unfortunately without an engine for real and sustainable growth.

Furthermore, the amount of interest keeps rising, while raising interest rates is not an option like it was to fight the notable inflation of the late 70's after the Dollar was taken off the gold standard by Nixon earlier in that decade.

Not only is a meaningful reduction in deficit spending just not politically feasible, but no real pain is felt from perpetual borrowing given such historically low borrowing rates.

Debt Monetization

The Fed is not yet directly buying equities or corporate bonds to prop them up like Japan is doing. Nevertheless, the Fed is buying almost 100% of all long-dated (10 year +) bond issuance, and has been since the first Operation Twist program began.

Since Treasury debt with a tenor of three years or less is basically equivalent to currency (Zero Interest-Rate Policy or ZIRP through 2015), the Fed is effectively monetizing all of the inflation-risk Treasury debt.

Nevertheless, this policy is also shooting itself in the foot since the Fed wants some inflation, yet its policy is muting increases in the primary inflation signal, i.e. the long bond rate, since deficit funding is really all that matters for policymakers like Bernanke.

Once the country’s economic system is unable to naturally expand at an exponential rate, the liabilities will basically become unfunded. The only real choice at that point will be how many of the unfunded liabilities will have to go into default and how assets are liquidated to pay creditors.

It's All a Balance Sheet

Another possibility is that the monetary authorities could print currency like crazy to make up the differences and officially attempt to reduce the debt burden. Of course, this would lead to further devaluation of their currency.

History has shown that humans are no further down the evolutionary path in this regard. This paper currency system will eventually collapse since interest is attached to the medium of exchange. Basically, building a monetary system based on "interest" or debt will eventually fail, just like all previous debt based monetary systems have collapsed.

What will be left when the dust clears after this monetary collapse, will be the few hard assets that have not already been re-hypothecated by banks and brokers. Gold and silver happen to be the only hard currencies available to most investors, and silver even more so than gold.

But not for long. As Voltaire once observed back in 1729, “Paper money eventually returns to its intrinsic value — zero.”

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