more: Leveraged Bubbles
Question: Inevitable Currency Collapse?
Premise 1: All dollars are borrowed into existence. The Fed, for example, creates dollars to purchase government bonds, which, in turn, are paid in dollars, but those dollars are backed by debt. Around and round we go.
Premise 2. The debt can’t be extinguished, so debt grows while the marginal utility of debt declines. You borrow $100 from the bank, then repay your bank with $100 then your cash declines by $100 and the bank’s loan balance declines by $100. But what happens to the $100 used to buy a tool for your business. Now the tool maker has the $100.
Can the debt be paid back out of current income? When the marginal utility of debt reaches zero or a negative number, then the dollar has to collapse since the value of the debt will have to decline until collapse. Ernest Hemingway, said, “We go broke in two ways. First slowly and then suddenly.”
How does the dollar die? It drowns in debt. The money supply may even be decreasing as debt defaults, but the value of other debt collapses and thus the dollar. Remember that all dollars are backed by the balance sheet of the Federal Reserve.
I am not saying that the dollar will collapse tomorrow but what will stop the inevitable? Since all other currencies are a derivative or the reserve currency, the US Dollar, you will see greater stress in foreign currencies before the dollar shows the same level of decline.
Question 2: If fiat currency laws were eliminated and people could choose their own money, would interest rates remain LOW and S T A B L E?
Hint: note how relatively stable interest rates were between 1880 and 1913. What set the rate of interest?
Question 3: Does a long-term decline in interest rates hurt businesses? How? What adjustments would you make as an analyst in such an environment?
Prizes to be determined.
The end game?