This is the flaw that has been assiduously avoided ever since it took over the global monetary system almost four decades ago.  The time is approaching where further avoidance will no longer be possible.

It consists of the simple fact that all of today's money is created as the result of the issuance of a debt.  A money is a medium of exchange and an exchange is a completed transaction.  A debt, however, is by definition an INCOMPLETE transaction.  It is not a final payment, it is a promise to pay.  In the long run, a medium of exchange cannot be a promise to pay, it must tender final and complete payment.   

A debt-based transaction can be finalised by payment of principal and interest or it can be defaulted upon.  In a viable monetary and financial system, the money available to be lent out represents an excess of production over consumption. Money does not change reality.  In the real world, nothing can be lent to somebody else which does not exist.  Unless and until the lesson is finally learned that money is NOT wealth and that creating more money does NOT add to prosperity but guarantees penury, the prosperity and happiness of the world will be a pale shadow of what it could be - and should be.

Learning The Lesson Yet Again:
    
Take a long hard look at what the two distinct sectors of the economy in every G-20 nation have been doing ever since the onset of the GFC a little more than two years ago.  The first sector is composed of all levels of government, the central bank and its "handmaidens" - the banking system.  

Governments are "stimulating" and guaranteeing.  They are injecting vast amounts of "money" into the economy while telling their citizens that this is the ONLY means to preserve the system.  They have not added one iota of real wealth to the economy.  Most central banks are facilitating these government schemes by lowering interest rates and literally monetising government debt paper.  This discourages savings by reducing or eliminating any incentive to save.  The central
banks have destroyed a rational price system by relieving the commercial banks of their "toxic sludge", the debt paper which can no longer be either serviced or repaid by the debtors. Relieved of this black hole in their balance sheets, the banks are taking the stimulus payments made by government and channelling them straight back into the markets for debt "assets".

Thus, they are delaying the inevitable.  The crunch would have been big had it happened at the beginning of the GFC in mid 2007.  It was postponed.  It would have been bigger had it happened when Lehman turned up its toes in October 2008.  It was again postponed.  It will be bigger still when the rest of the world finally reaches the point where they can no longer even pretend to "support" the US Dollar as the foundation of  the system.  At that point, postponements are impossible.  The best illustration that such a point is approaching is the relatively sudden and universal concern over the falling US Dollar.

On the other side of the picture stands the other sector of the economy, the sector which does NOT have the legal ability to create its "money" by issuing an IOU.  Here, the actions are diametrically opposite to what is going on in the government sector.  Even by government measuring standards, unemployment in the US is now 50 percent higher than it was this time last year.  In a recent Bloomberg poll, three out of four Americans said they had reduced spending over the past year.  Looking ahead, only 8 percent of households polled said they expected to increase spending over the year to come.

Total debt held by Americans fell by 5.8 percent over the year to August according to the Fed.  Credit card debt fell by 13.1 percent with one in three Americans having paid off or closed a credit card account over the past 18 months.  And for the first time ever, debit card transactions are exceeding those done via credit card so far this year.  The contrast between "public" and "private" is stark and is being noticed. What has yet to be noticed is the means by which this contrast is being perpetrated.  Fundamentally, that is a debt-based monetary system, the core of which - the US Dollar - is losing ground fast.

Ó 2009 – The Privateer

http://www.the-privateer.com

capt@the-privateer.com

(reproduced with permission)

SUBSCRIPTIONS:

Delivery via email

Trial: 5 issues (once only)

Six-Month: 12 issues

Annual: 25 issues

Two-Year: 50 issues

Subscribe at www.the-privateer.com/sub.html