Many families have a deadbeat lurking somewhere in the family tree. Let’s consider the story of a rich man, whom we’ll call Gomez. His 34-year old son, Pugsley, is between jobs. “Dad, I need to borrow a thousand bucks.”
“What do you need it for?”
“To get the landlord off my case.”
“How are you going to pay me back?”
“I’ll figure something out.”
Gomez thinks about it, and decides to draw up a loan contract. Pugsley signs and Gomez writes him a check for $1,000.
How much would you pay to buy this loan from Gomez? Personally, I wouldn’t touch it with a ten-foot pole.
Gomez also lends to his daughter Wednesday, Cousin Itt, Uncle Fester, and 996 other unemployed and unemployable creatures. Then he goes to his lawyer, and bundles it up as a security. The offering memorandum is over a hundred pages and it looks like a beautiful thing. At least that’s what the ratings agency says.
Gomez sells a 5-year bond, backed by a thousand loans that cannot and will not ever be repaid. But, hey, it offers 2.2% interest. Thanks to the Fed, there is scant interest to be earned anywhere. The market, full of institutions that can borrow at near zero and hungry for anything with a yield, buys up Gomez’ bond.
Your bank, which borrows from you and other depositors, buys the bond. That means it’s now backing your savings account, your money. Your money is safe so long as the bond remains good.
Gomez can call it a “bond” if he likes, but that’s a lie. A true bond finances a productive enterprise. For example, Apple uses the money to finance a new plant to make sapphire screens for the iPhone. Investors in the Apple bond can rest assured that Apple will pay back the debt with interest, from the profits made by selling phones.
Gomez’s bond is going to default, though he may be able to kick the can down the road for quite a long time. For instance, he could sell a new bond to pay the old one.
The bond stinks like a week-old fish, and any bank account depending on its repayment is also rotten. It’s counterfeit, all of it.
This is how I think of inflation—the issuance of bad paper money.
The proportion of bad credit in the market is growing, like a tumor that takes over and displaces healthy cells that support life. Every day, counterfeit bonds mature and have to be paid. Issuers sell new bonds to pay the old ones. The new bond is typically larger, because of the interest that’s constantly accumulating.
This is a crime, a debauchery, a debasement on massive scale. By comparison, Charles Ponzi was the junior varsity.
How does it make you feel, to see fraud conducted in the open and with the approval of the government? I know how it makes me feel, but this is a G-rated column suitable for audiences of all ages, so I will hold back a few choice words.
How does society respond to something like this?
Steve Forbes answers that question, in his book Money. He noted that, “The stealth thievery of monetary debasement trickles down too.” If the top bankers and government officials are crooks, people wonder, why should we be honest? Forbes quotes Henry Hazlitt’s answer to this question, “Reward comes to depend less and less on effort and production… Corruption or crime [seems] a surer path to quick reward.” Forbes closes the chapter with a universal truth, stated in his own words, “When people stop trusting money, they stop trusting each other.”
Inflation—monetary counterfeiting—can cause prices to rise. Unfortunately, that’s the least of the harms it does to us, and to our society.
The Gold Standard Institute Presents The Gold Standard: Both Good and Necessary, in Manhattan on Nov 1. You are cordially invited to join us for a discussion of ideas you won’t get anywhere else. The gold standard is the monetary system of the free market—of capitalism. Dr. Andy Bernstein, a rock star of the liberty movement, shows why capitalism is good. In my talk, I explain why capitalism is impossible with fiat money, and why we have not recovered from 2008, and we won’t without gold.