Question -- Russell, why do you despise fiat money?

Answer -- Here's why -- I've worked hard all my life. In 1971, Nixon refused to pay off America's international debts with gold as per international agreement. The world reluctantly accepted Nixon's cop-out , and nations went totally off the gold standard and on to fiat money.

Let's say I work all my life for a total of $3 million. The Federal Reserve, by a simple computer computation, can "create" a billion dollars (actually Federal Reserve Notes) in a few seconds. The fact is that a bunch of central bankers can create, with no sweat, no work, no thinking, a billion dollars, while I have to sweat and work all my life for a fraction of what the Fed can create in a matter of seconds? I say it's unethical, it's illogical and it's absolutely immoral.

The Fed has had a policy of producing 2% inflation every year regardless of what's happening in the economy. Increase the money supply 2% a year for every year since World War II and what do you have? Over time, you have a massive increase in prices known as asset inflation.

Consumer Buying constitutes roughly 70% of the nation's Gross Domestic Product. But trees don't grow to the sky and neither to green shoots. Suddenly with the new "globalization," Asia joined the world economic community. The act was originally greeted as a great source of demand. But it turned out to be a huge source of supply. Asia is a collection of hard-working, low-cost quantity producers. With China and Asia joining the world economic community, too much merchandise and manufactured goods were produced. The price structure couldn't hold up. Because of central bank created-inflation, prices were previously driven to extreme overvaluation. The law of "regression to the mean" started to operate. The price of everything in terms of fiat currencies had grown unsustainably high. In the face of Asia's massive new production, the entire economy of the planet buckled and prices crumbled. With debt at sky-high levels, everything that was leveraged came under pressure (and everything actually was leveraged). The world suddenly faced a process of ruthless deleveraging along with deflation.

Fear of another Great Depression faced the world's central bankers. The central banks fought the deflationary forces with an increased supply of fiat money while buying up toxic loans and supporting failing corporations. Ex-Wall Streeters, strategically placed, took over, and are currently running the US. Wall Street bailed out and took care of its own. As things stand, the great mass of Americans don't know what the hell is going on, except that they know that they are losing their jobs and their mortgaged over-priced homes and their life savings.

The battle to save economies goes on. The feared enemy is deflation. How do you conquer deflation? Deflation, by definition, represents an insufficient amount of money dealing with too great a supply of goods. So the Bernanke solution is tried -- create trillions in new money. Urge consumers to buy, buy, buy. And bury deflation in a rising tide of fiat money.

But wait -- there's a problem. When you create all this new money you are also creating mountains of debt. How do you pay off this debt? You can renege on it (unthinkable) or you can refinance it (push the pay-off out to as many years into the future as possible) or you can systematically inflate it away. The easiest and time-tested way -- inflate it away.

At some point, so much fiat "junk" money is created that people no longer trust it. That's the situation China is in now, with its $1.7 trillion hoard of US dollar-denominated securities. So what does China do? It decides to swap its US dollars for anything intrinsic. And that means that China is buying commodities, land, mines, corporations, rare earths, gold, anything of intrinsic value with fiat money that it earned from the US. China is very smart. It doesn't just dump its US securities, which would wreck the market. Instead, it uses its dollars to buy something of intrinsic value. In this way, China solves two problems. It gets rid of dollars, and it buys assets at bargain prices. Assets that it knows it will need in the future.

Maybe you and I should be doing the same thing.

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