01/29/10 Paris, France – Science and technology have produced many wondrous breakthroughs. But there are some things it cannot improve. A kiss from natural lips is still the lover’s choice. Baby formula proved no match for the real thing. Ersatz money is a flop too. That last item is not so much a fact as a prediction.
The first modern competition between gold and paper money ended like the pre-modern ones. Gold won. Herewith, a short summary:
A rogue, John Law, was the protagonist of the story. He killed Beau Wilson in a duel. Then, he went on the lam…first to Scotland…then to Amsterdam…and finally to Paris. Like Alan Greenspan or Ben Bernanke, he made himself useful to people in high places – in this case the Duke d’Orleans, who needed money. Law had a way to get it:
“I have discovered the secret of the philosophers’ stone,” he is said to have remarked, “it is to make gold out of paper.”
We need to look no further. Law may have been good with figures; it was at philosophy that he failed. A thing cannot be both one thing and a different thing at the same time. It is either gold. Or it is paper. Rarity and durability give gold value – as money. Paper’s most conspicuous properties are just the opposite – it is common…and has a tendency to curl up and blow away.
Law’s new, easy money helped France to an economic recovery – or so it seemed. But in the end, the philosophical error caught up with him. Gold has real value. If you can create it at will, why not create more of it? It was just a matter of time before he had created too much. Soon, there was an angry mob outside Law’s office on the Rue Quincampoix. People who held his paper gold had come to see it in a different light. Where once they cherished it as paper gold…now they despised it as nothing but paper.
Law’s scheme increased France’s money supply – including banknotes and shares in his Mississippi company – by 300%. Prices in Paris doubled between 1718 and 1720. Then, when the new money system began to give way, the Duke d’Orleans “cranked up the printing press.” By 1721, Law’s money was worthless. “Banque” was a dirty word in France for the next 200 years.
The current experiment with paper money began on the 15th of August 1971. Henceforth, said Richard Nixon, foreign countries that wished to exercise their right to trade US dollars for gold could drop dead. From that point forward, the dollar was worth only what someone would give you for it. Philosophers held their breath. But nothing happened. Many have died since, waiting for the dollar to succumb first. Still, the millstones of monetary history may grind slowly, but the more slowly they grind, the more fingers they pinch.
The new paper money standard allowed for a worldwide credit boom – just as in Paris following the establishment of Law’s scheme. The US created dollars. Its citizens spent them. The dollars accumulated as reserves all over the world…and every central bank raced to keep up. Soon, the exporters were producing too much. The importers were consuming too much. And there was too much money and credit everywhere.
The Japanese economy was the first to blow up – in 1989. The tech sector on Wall Street was next to go – in 1999. Finally, in 2007, the planet-wide bubble popped. Suddenly, the whole world was Japan. And now, every nation in Christendom, to say nothing of the others, is following Law’s example. All issue paper gold – in the form of bills, notes, and bonds – as if they were the Banque Royale. Europe is estimated to need $2.2 trillion in deficit funding this year. America will need at least a trillion more. If the depression deepens, maybe $2 trillion. How long can this go on? Where will it lead?
“There are no means of avoiding the final collapse of a boom brought about by credit expansion,” wrote Ludwig von Mises. “The alternative is only whether the crisis should come sooner as a result of voluntary abandonment of further credit expansion, or later as a final and total catastrophe of the currency system involved.”
On Tuesday, the S&P rating agency issued a warning. If Japan continues in the direction it is going, it will have Hell to pay. Japan leads the way into the future. And into a monetary minefield. Her current deficit – a record – is more than her tax revenue. And her public debt is nearly 7 times as great. Her feet grow larger.
No natural life survives the lifecycle. And no paper currency standard has ever survived a complete credit cycle. It is just a matter of time until we hear the explosion and see body parts flying.
Regards,
Bill Bonner
for The Daily Reckoning
Bill Bonner
Since founding Agora Inc. in 1979, Bill Bonner has found success and garnered camaraderie in numerous communities and industries. A man of many talents, his entrepreneurial savvy, unique writings, philanthropic undertakings, and preservationist activities have all been recognized and awarded by some of America's most respected authorities. Along with Addison Wiggin, his friend and colleague, Bill has written two New York Times best-selling books, Financial Reckoning Day and Empire of Debt. Both works have been critically acclaimed internationally. With political journalist Lila Rajiva, he wrote his third New York Times best-selling book, Mobs, Messiahs and Markets, which offers concrete advice on how to avoid the public spectacle of modern finance. Since 1999, Bill has been a daily contributor and the driving force behind The Daily Reckoning. Dice Have No Memory: Big Bets & Bad Economics from Paris to the Pampas, the newest book from Bill Bonner, is the definitive compendium of Bill’s daily reckonings from more than a decade: 1999-2010.
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Bill,
I’ve read this site for some time now and I’ve absorbed a lot of what you’re saying. I must say, though, that I’m growing tired. I’m tired of hearing financial people saying, “the end is near” when nearly everyone goes about their lives as if there’s literally nothing wrong. I had to go buy a new shirt this morning and drove down to the mall. The place was packed. The halls were filled. People are buying as though there’s literally nothing wrong. The vast majority of the population seems completely unaffected by all of this.
I’m growing tired because nothing has happened. Sure, a few banks have folded, and a few others have been bailed out. Nothing has happened. I prepared over three years ago for a complete collapse here in the States, and everyday that goes by I keep asking myself if I’m like one of those suckers that built a bomb shelter back in the Cuban Missile Crisis days and never used it. I’ve made the preparations, and yet here things are, going on as though nothing is at all wrong.
At this point in the game, I’m tired enough to say this: Pick a date and let’s get on with it, or I’m going to stop reading all of this and I’m going to live like everyone else. I’m tired of waiting for what everyone says is coming, and yet never arrives.
12/21/2012
There. Happy now?
To those shoppers in the mall; Ignorance is bliss. Ha! I too have planned and dollar cost averaged out of the market to 20/80. Now what? Precious metals? Didn’t they take a hit 12mo. ago. And what to do with my rental properties? Sell em while interest rates are low and there’s still some market left?
Walk around like nothing’s wrong. Yea! Problem solved.
Hey Bill
Whatcha think about the 5.7% GDP???? Boom times are here again!!!
bpg131313. Bill tells it pretty straight most of the time. He’s not telling you to buy a ‘economic’ bomb shelter. He’s just informing you of what he sees happening leaving it up to you to decide what YOU want to do.
bpg131313…
Why don’t you go live like everybody else now! There is no guarantee another collapse will happen in 20 days or 20 years. If you are too ignorant to see what is coming and decide for youself, then you belong in the mall with the rest of the sheep.
bpg131313: There is a reaction, and there is an over-reaction. If you are sitting in your bomb shelter with in foil on your head, you are probably over-reacting.
I too have been planning for the inevitable for a while now. But I still live my life. I still buy things my family and I enjoy.
Many things I have started to do as a reaction to the eventual fall of the USD, such as learning to garden, collecting rainwater and designing my solar power system, have brought me so much enjoyment that even if the system never collapses, I wouldn’t have any regrets.
You sound like you want a collapse to happen, which is scary to me. Prepare for – do not wish for this to happen.
bpg131313,
Feel for ya pal, but don’t worry it will get worse, i would put something out there, the only reason you don’t see how bad it is, is because the government has been spending out the wazoo on unemployment compensation, but don’t worry i see people using their access cards at gas stations. It’s bad, i mean heck, 5.7 % growth last quarter and down finishes down for the day? People aren’t buying the bull anymore, when the market crashes, lots will go with it, like insurance companies and others. Just look for higher interest rates and sit back and enjoy the ride.
Maybe there will be no sudden emergency, but just a slow grind toward a very reduced standard of living.
lagirl, you’ve got the best comment.
Well said.
The gvmnt is great at producing “a very reduced standard of living.”
It’s what they do best.
Thank you.
bpg131313 states in his comment that:
“The vast majority of the population seems completely unaffected by all of this.”
I beg to differ and would put forth that the truth of the matter is that the vast majority of people are simply still unaware of this. They are affected by it nonetheless……and therein lies the danger. What you do not know or understand has a tendency to get you when it is too late for you to do anything about it.
At least , you are aware and can prepare. The past predicts the future, and if humans had ever learned anything from it, we would not be in yet another instance of history repeating itself once again. As long as we continue to think like sheep and act like herds, nothing will change.
Enjoy your standard of life while it lasts, or prepare with the knowledge that humans will always make the same mistakes over and over again.