How Good is Gold? How Bad is the Fiat?

Jim H
By Jim H on Fri, Jan 10, 2014 - 9:45pm

I have always thought that Gold's place in the monetary universe can only be truly appreciated by developing a deep understanding of the workings of the predominant fiat currency, as controlled by central banks.  It happens that a piece published (outside the pay wall) on the TFMetalsreport website recently serves very effectively in illustrating the depths of fiat dysfunction. 

Here are the main points that the writer, a contributor who goes by the name Pining 4 the Fjords, makes;

The first point is that I don’t think people truly understand the scope of the problem that modern central banks and politicians have created for us. We are now in a cycle of malinvestment that has lasted literally for generations, and hence has created worldwide malinvestment on a scale never before seen in human history.  The second point is that the depth of this malinvestment goes well beyond government spending and the odd “bridge to nowhere” or the thinly-stretched balance sheets of multinational corporations.  The scope of malinvestment has profoundly shaped generations of people – human capital being the most precious capital of all – and has left enormous swaths of society ill-equipped and ill-trained to actually produce anything of value, once the easy money spigot is turned off. 

link:  http://www.tfmetalsreport.com/blog/5370/our-daily-bread

Others like David Stockman talk about the same process, which is now coming to a head;

Eric King:  “What is the danger going forward as you see it?

Stockman:  “The danger is that none of these markets is stable.  None of these markets reflects true supply and demand.  None of them properly discounts real-world factors, whether it’s cash flows, economic future, and all the other things that markets are supposed to do.  The markets today jump to the tune of the minutes of the Fed meetings, of daily word clouds that are emitted by various Fed speakers.  This really isn’t a capitalist financial market.  It is entirely a ‘hothouse’ system driven by a rogue central bank that has totally usurped the role of capital and money markets.” '

link:  http://kingworldnews.com/kingworldnews/KWN_DailyWeb/Entries/2014/1/10_Da...

So, it's not just about the creation of too much money... it's about the effects of making too much easy money, for too long.  And it's not just something that started during the mortgage crisis in 2007, it has been brewing, slowly at first, and accelerating in hockey stick fashion more recently.  We, and our Congress, should have never been able to borrow so far into the future as we have... but this is one of the, "miracles" of the centrally planned fiat money system... said a different way by Pining;

    Now think about this:  the situation you see around you is what 17 trillion in debt, borrowed from the future to “stimulate” the economy of the present, has managed to buy. Six trillion of that debt has been run-up in just the last five years.  We have borrowed from futurity such an enormous amount that it will not, in all likelihood, ever be paid back.  And this is what we have bought-  this grueling existence with 45 million on food stamps, jobs disappearing or being replaced with temporary or part-time menial labor, this walking dead economy.  These are the GOOD times, purchased by borrowing from future prosperity.  Think about that long and hard, and if you ever truly wrap your mind around this it will keep you up at night. 

The evidence of the long term, multi-generational distortion of the money we use can be seen easily in a long term chart of inflation/deflation cycles... the fact is, since the 1950's, deflation has been almost entirely conquered by our central bank planners... Hurrah for us!

The unwind from all this distortion is going to be a bitch. Look at the above chart again and ask yourself;  Is this going to end in deflation?  Got Gold? 

14 Comments

sand_puppy's picture
sand_puppy
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Jim H: What is meant here by "malinvestment"

This is a term that I don't understand well.  You quoted Pining 4 the Fjords:

We are now in a cycle of malinvestment that has lasted literally for generations, and hence has created worldwide malinvestment on a scale never before seen in human history.  The second point is that the depth of this malinvestment goes well beyond government spending and the odd “bridge to nowhere” or the thinly-stretched balance sheets of multinational corporations....

If you could give some examples of malinvestment and how this results from borrowing excessively from future generations, this might help me understand the term and the process.

Thanks. 

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davefairtex
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unwinds from inflationary debt bubbles

So Jim, according to austrian economics, the classic unwind from an inflationary debt bubble is deflation.

Given how massive the bubble is, your chart makes a fantastic case for a reversion to the mean deflationary crash to dwarf all deflationary crashes.

The big question for me is, can our central planners continue to conquer the natural cycles of inflation/deflation forever?  I know they want to, but can they?

I agree that the desire is there, but the thing that keeps me awake sometimes is the little voice that whispers, what happens if they can't?  What happens if they've unleashed forces they don't understand, and that the market at the end of the day is more powerful than money printing and jawboning, etc.

This whole thing reminds me of what happens in a forest when the Forest Service prevents the small forest fires.  The undergrowth builds and builds, and then when the fire comes that they can't prevent, it burns so hot that the whole forest is burned down to ash.

Just saying.  :-)

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Deflation...

Hi Dave... I understand that deflation is where we should be.. for sure.  The Gov't tells us we don't have much inflation.. but that's not what my grocery bill says, nor my local tax bill, nor what my bill at the diner says, nor... oh well, you get the point.  There is fundamentally no reason why the US cannot embark on it's own Japan-style shock-and-awe QE5 if needed... why would they not do whatever it takes?  Regardless, it seems like we will run out of Gold (for price suppression) to keep the beast fed before that happens... we shall see. 

To believe in deflation, you have to wrap your mind around the idea that your dollars will start buying more stuff... is that ever going to actually happen?  Dollars may become more scarce for the common guy on Main Street, but with the Gov't acting as buyer of last resort, through continued deficit spending... there will still be lots of dollars floating around.  Maybe housing will get cheaper.. but is a bubble bursting (again) really deflation, or just some kind of mean reversion for that particular good?  I want my dollar to buy more gas, more car, more food.... and I just don't see it Dave.  In fact, the idea seems loony.. imagine your grocery bill going down?  Lunacy I tell you  cheeky

Sandpuppy my friend,  Malinvestment is stuff that gets bought and built that might not have been if free market forces had been allowed to play out their magical creative-destructive force, and if money had not been so cheaply had.  Centrally planned investment, and those areas of investment favored by centrally planned cheap money and Gov't policy, are often not those that the free market would choose.  As usual, Wikipedia comes to our aid;

  

From Wikipedia, the free encyclopedia
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Malinvestment is a concept developed by the Austrian School of economic thought, that refers to investments of firms being badly allocated due to what they assert to be an artificially low cost of credit and an unsustainable increase in money supply, often blamed on a central bank. This concept is central to the Austrian business cycle theory. Austrian economists such as Nobel laureate F. A. Hayek advocate the idea that malinvestment occurs due to the combination of fractional reserve banking and artificially low interest rates misleading relative price signals which eventually necessitate a corrective contraction—a boom followed by a bust.[1]

The concept dates back to at least 1867.[2] In 1940, Ludwig von Mises wrote, "The popularity of inflation and credit expansion, the ultimate source of the repeated attempts to render people prosperous by credit expansion, and thus the cause of the cyclical fluctuations of business, manifests itself clearly in the customary terminology. The boom is called good business, prosperity, and upswing. Its unavoidable aftermath, the readjustment of conditions to the real data of the market, is called crisis, slump, bad business, depression. People rebel against the insight that the disturbing element is to be seen in the malinvestment and the overconsumption of the boom period and that such an artificially induced boom is doomed. They are looking for the philosophers' stone to make it last."[3]

I honestly think much of the suburban sprawl that Kunstler rails at is a form of malinvestment.. had capital been more precious, I don't think we would have covered so much farmland (in Dutchess Cty NY for example) with McMansions and strip malls.  I don't think we would have so many fracking wells pulling ahead the last bits of US oil in record time - cheap money got these wells going.. but the market for derivatizing these short-lived wells has smartened up - take note of the track record of the trust vehicles for some of these wells;  SDT, and PER.  SDT sports a 26% yield for gosh sakes... and that is only because the month-to-month payouts have been dropping so fast.  

Cheap money for too long has set us up for this epic bust... it has caused us to lever up the unsustainable into more and more... of the unsustainable.  If you really look at it - the entire deindustrialization of the West, which was driven by the availability of cheap (for us to print) US dollars...  is looking like one huge malinvestment to me.  Hugo Salinas Price explains this better than I can;

    

link:  http://www.plata.com.mx/mplata/articulos/articlesFilt.asp?offset=20&fiid...

Came the fateful day, August 15, 1971, and the US had to default on its promise to redeem dollars for gold – it was going to be only a “temporary” suspension, Nixon assured the American people. Alas, in politics nothing is more permanent than a temporary measure. The dollar became the full-fledged fiat currency of the world.

Thus the world entered into the era of Globalization; torrents of dollars inflated the reserves of the Central Banks of the world; world trade boomed because trade deficits were now easily “settled” with fiat dollars.

World trade had heretofore been an exchange of goods for goods, with gold only moving to settle transitory differences. That was now not the case: goods were no longer paid for with goods; in international trade, imported goods were now paid for with exported goods and with dollars, of which the supply was abundant.

Here we begin to see the effects of fiat money as the world’s currency.

Cheap goods from the under-developed countries began to flood the economies of the developed countries, with insufficient compensating purchases of goods on the part of the under-developed countries. Industries began to move out of the developed countries and into the under-developed countries which enjoyed burgeoning export sales.

De-industrialization of the West set in under globalization, which was constantly extolled as the new, modern and progressive structure of the world’s economy. Old industrial buildings were transformed into structures harboring cafés, restaurants and art shops.

The de-industrialization was masked with credit expansion facilitating consumption, not production, which was un-economic under the globalization scheme. Stagnant or falling wage earnings were supplemented with easy credit for the masses.

This all happened because the money the world has been using since 1971 is fiat money, not real money. But still, at this date, you hear very few voices recognizing this fundamental fact.

       

 

 

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Jim H
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You've got Mal (investment)

More clarity on the nature of malinvestment comes from the Acting Man blog, where a new piece discusses the ultimate theoretical case of malinvestment;  Communism as per Marx (Darbikrash alert);

However, not only did they in fact follow the precepts laid down by Marx and Engels, but even if e.g. Stalin had been a veritable angel, the system would still have failed. Socialism is literally impossible as Mises has already proved in 1920. In brief: it is a system in which rational economic calculation becomes impossible, because there are no longer prices for capital goods once private property in the means of production is abolished. A system bereft of economic calculation can no longer allocate scarce resources efficiently. It cannot really be called an economy anymore. It a system that is doomed to break down in short order, and the only reason why it survived as long as it did in the former Eastern Bloc was that the COMECON planners were able to observe the price system in the capitalist countries and so could engage in a rudimentary form of economic calculation. Had the whole world become socialistic, the economy and division of labor would have completely collapsed within a few years and people would have been forced to return to a hand-to-mouth existence, barely able to subsist. Life would once again have become 'nasty, brutish and short'.

link:  http://www.zerohedge.com/news/2014-01-10/rolling-stone-resurrects-karl-marx-and-no-it-was-not-satire

Malinvestment is the failure to allocate scarce resources efficiently, profitably.

 

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davefairtex
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to believe in deflation

To believe in deflation, you have to wrap your mind around the idea that your dollars will start buying more stuff... is that ever going to actually happen?

Looking at the commodity complex prices, yes, I can believe that my dollars can buy more stuff.

It all depends on the size of my shopping cart, and the goodies I'm putting into it.

For instance, if I'm buying bulk commodities, my dollars will buy me more wheat, more corn, more coffee, more sugar, more rice, more gold, more silver, more platinum, more cattle, more copper than they could in 2011.

Turns out, there IS deflation in commodity prices.  That's what the bear market in gold/silver is all about.  Deflation in gold prices.  Same dollar buys you more ounces.  Deflation.

And I KNOW your shopping cart has gold in it, don't try and tell me differently!

:-)

 

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Aren't we So Clever?

If we could stop crowing about the demise of communism for a moment and reflect on mal-investment in the West.

Which country has the biggest military industrial complex in the world?. How much money does each dollar spent on the complex return? Zip. That is one huge extravaganza. Macho men doing macho things with other peoples money.

Kunstler is right, suburbia was a bad idea too.

These commentators on the demise of communism use too many declarative statements. It was caused by this, or it was caused by that, but never "in my humble opinion".

So if Capitalism is so all-wise in spending money, how are we going to price the planet? Or for that matter how does the market price in getting our sorry touches off this planet once it becomes uninhabitable?  Answer - It can't.

Capitalism has got hairs on it. Orlovs Invisible Idiot attached to the Invisible Hand. It is an archaic left-over from the days of the Viking. Those days are behind us. We, the people of this planet, either pull together or die together.

Something about a mote in your brother's eye.

Forget Mises, Hyak and Marx. They were not giants, just naughty boys. Follow Sesame street. It is all about cooperation.

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Extrinsic malinvestments

If Arthur is correct and it's all about cooperation then all the extrinsic monitary motivators models also called our individual bank accounts are failing us. These types of relations just further the separation we are feeling, and are driving the forces of malinvestment. Maybe just maybe climate change will be our missing higher level predator that can bring the balance back keeping those checks and balances.

or maybe we have persisted for to long and chosen a monster bent on total destruction. If you look around and find evidence of malinvestment then obviously it's a result of malinvestment within human nature. The imbalance of extrinsic motivators has been allowed for to long on to large a scale. This web space is a good example for solutions as I do believe we are all sharing thoughts and experiences without good jobs and monitary equivalent. Now we are in the forth quarter and I'm to scared to check the score board or time remaining. It's a good thing I am playing this sport because of personal enjoyment of the activities and not because of the trophy. I do understand how painful it will get for those with stakes. Post game interviews can be so revealing!

Rose

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All of these discussions seem

All of these discussions seem to proceed on the assumption that economics is a hard science with orderly laws and theorems to regulate how the global economy works.  Terms like "Austrian school", "keynesianism", "capitalism" and "socialism" promote the idea that we can structure our economies in some ideal form that would ultimately benefit everyone and that the real battle lines are between these schools of thought.

I think its clear by now that economics is not a hard science.  There are far too many extrinsic factors to ever develop a rational workable economic structure without recognizing that ultimately our economy is called earth.  The PP site takes some of the larger factors into account, like energy and other physical resources.  We recognize to some extent that the effects the plundering or those resources have affected our lives and well-being, but still fail to take into account the longer term and larger effects.  That is at least partially because it is monumentally difficult to account for all the externalities, but also because we just don't care about damage that is beyond our immediate cognizance.  Out of sight, out of mind.

I suggest that until we can quantify the many abuses we are inflicting on the climate, biosphere, oceans, species, cultures, wetlands, waterways, soil, woodlands and other real (not necessarily economic as we currently view that term) resources, and incorporate those abuses into our economic calculations, we are engaged in so much pissing in the wind and further destruction of the real economy (earth).  I further suggest that the wisest course to take when we don't fully understand or care what we are doing to the earth is to stop doing it and start caring.  That, of course, requires radical changes to our ways of life, but in a macro sense, I don't see how our species can continue to live on this planet in the long term without those changes.  Short term arguments between one kind of ism and others, when all of them are ultimately destructive, are not helpful.

Sorry to wax so philosophical on a Saturday morning, maybe its because the weather is dismal, cold and rainy here today while I want to think about baseball and other of life's finer moments.

Doug

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waxing philosophical

I further suggest that the wisest course to take when we don't fully understand or care what we are doing to the earth is to stop doing it and start caring.  That, of course, requires radical changes to our ways of life, but in a macro sense, I don't see how our species can continue to live on this planet in the long term without those changes.  Short term arguments between one kind of ism and others, when all of them are ultimately destructive, are not helpful.

That's Doug, speaking Ex Cathedra.

Please forgive us for enjoying our non-helpful discussions about this topic anyway, ok?

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Doug
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davefairtex wrote: I further
davefairtex wrote:

I further suggest that the wisest course to take when we don't fully understand or care what we are doing to the earth is to stop doing it and start caring.  That, of course, requires radical changes to our ways of life, but in a macro sense, I don't see how our species can continue to live on this planet in the long term without those changes.  Short term arguments between one kind of ism and others, when all of them are ultimately destructive, are not helpful.

That's Doug, speaking Ex Cathedra.

Please forgive us for enjoying our non-helpful discussions about this topic anyway, ok?

No problem, I try to follow them myself because they are short term useful.  But, then I am struck with the feelings of futility.

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Leave it to the PP.com crowd....

To take this discussion way beyond Gold vs. Fiat... what a cool place!  While I think the combination of capitalism and debt-based fiat money would work better if operated in the context of a reasonably well regulated (i.e. Glass-Steagall)  free market (minimal or no FED) environment, I do agree with points made by Arthur, Doug, and Rosehip that suggest that capitalism and the profit motive does not seem to promote the kind of behaviors that are going to lead to our survival as a species.  I think that the profit motive does a great job of spurring innovation forward... but capitalism has become so short term oriented, and we seem to have no means (think the absurd levels of mounting debt across most nations) of regulating our actions today based on probable bad outcomes farther down the line.  

I certainly don't have the answers either.  In my own utopian system there would be a base level of the earth's bounty that all humans have a right to.  Above this, there would be the opportunity to acquire more resources legitimately through hard work, inventiveness, creation of art... whatever other humans appreciate via the (human) market.  The thing that is missing I think, outside of some patchy framework of Gov't force that exists today (think EPA, think fisheries regulation) is the means by which we better account for the long term costs of our activities, to the earth and to ourselves, vs. the short term gains?  The burgeoning field of environmental economics is one hopeful sign, but these University-based programs generally imagine better guiding regulatory policy... not something more revolutionary.  

Here is how Dr. Steve Best describes the problem;

  There is a direct and profound relationship between global capitalism and ecological destruction. The capitalist economy lives or dies on constant growth, accumulation, and consumption of resources. The environmental crisis is inseparable from the social crisis, whereby centuries ago a market economy disengaged from society and ruled over it with its alien and destructive imperatives. The crisis in ecology is ultimately a crisis in democracy, as transnational corporations arise and thrive through the destruction of popular sovereignty.

link:  http://www.drstevebest.org/RevolutionaryEnvironmentalism.htm

Maybe instead of corporations being people, the US Supreme court should deem it that the earth is a person.. then the earth would have some rights herself.    

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I do get a chuckle out of all

I do get a chuckle out of all this Austrian mysticism and obsession with gold and alternative currencies. It takes the eye off the ball, which of course is the intention.

 

The “ball” in this case being a system that is perpetually self expansive, and in fact cannot function without expansion. A system where everything has a price, but no one knows what its value is. A system of shameless accumulation, and then valorizing all who accumulate, oh yes, with an occasional tsk, tsk, boys will be boys. Cronies will be cronies.

 

I guess if I was an Austrian, I would want to be digging in a very different direction. The Keynes/Hayek wars were fought a long time ago, and Hayek lost. Not saying Keynes was right, but he was in fact more right than Hayek.

 

Echo chambers make my ears hurt.

 

If I was an Austrian, I would be more than a little concerned about Larry Summers’ recent speech, and the rather surprising jumping on the bandwagon by more than a few mainstream economists to Mr. Summers’ thesis of “secular stagnation”. It seems that his conclusion is that capitalism cannot exist outside of a boom/bust cycle, so-called normal employment can never be achieved without the presence of a bubble, and we are doomed to a constant and never ending cycle of bubble inflation and bubble popping.

 

If memory serves, this conclusion was also reached quite some time ago by somebody else whose name cannot be mentioned, as to do so would conjure tanks rolling across the National Mall.

 

 

Of course, there was more than a grain of truth to that riposte. But rather than tackling the secular stagnation arguments directly, mainstream economists dismissed them with derision, in the sublime confidence that capitalism could never have crises. My favorite such statement was by Edward Prescott (who, with Finn Kydland got the Nobel Prize for inventing the "real business cycle, representative agent" approach to economics that still dominates the mainstream today). Entitled "Some obser­va­tions on the Great Depression” and writ­ten in 1999, it con­cluded with this rhetor­i­cal flourish:

 The Marx­ian view is that cap­i­tal­is­tic economies are inher­ently unsta­ble and that exces­sive accu­mu­la­tion of cap­i­tal will lead to increas­ingly severe eco­nomic crises. Growth the­ory, which has proved to be empir­i­cally suc­cess­ful, says this is not true. The cap­i­tal­is­tic econ­omy is sta­ble, and absent some change in tech­nol­ogy or the rules of the eco­nomic game, the econ­omy con­verges to a con­stant growth path with the stan­dard of liv­ing dou­bling every 40 years. (Prescott 1999)

Yeah, right. One decade later, that open­ing Marx­ist sen­tence began to sound a lot more real­is­tic than Prescott’s dis­missal of it.

And the inference here is that in order to keep people from starving, the government had better settle in to a long prolonged interventionist strategy, ‘cause you know, people gotta eat. So in a wage labor economy, people get jobs so they can eat. And it turns out the free market, with all its incumbent “magical” creative destruction, is not capable of providing this function in sufficient capacity to enable people to eat. Why yes, we can argue that academically, the market should function without external intervention, but then we’d have to overlook history, which shows us the opposite conclusion.

 

But is much more fun to argue that history is wrong, and to put forth a (preposterous) thesis that all of our woes are at the feet of debt based currency, malinvestment, and government intervention. We can instead grouse at the current Fed chairman like a bunch of old women, year after year, all the while certain that rampant hyperinflation is just around the corner. Really it is, just you wait and see! We can make one after another misguided prediction about the stock market collapsing this (last) year, commodity prices shooting to the moon (any day now) and oil prices inflating with reckless abandon.  We can constantly confuse profit taking in food commodity pricing with inflation (hey, even the packages are smaller- see it’s inflation)

 

And all this ends up with a lot of head shaking by the Austrians, what with sticking to principles and all. They just do not get it. Every single prediction-every one, wrong. Again.

 

Oddly, if the economy isn’t stimulated, if investments are not made, if there is insufficient demand, if there are no (or inadequately numbered) new businesses to absorb unemployed people, then people cannot eat. If large multi-nationals sit on enormous accumulated profits, and do not “reinvest” them to expansionist ends, then people don’t eat.

 

It turns out hungry people get restless.

One conclusion might be that capitalism will not, and in fact cannot accept any type of currency that imparts limits on capital growth. This is why gold will never be used again as a currency. Capital abides no limits, not resource limits, not labor limits, and not environmental limits- and certainly not monetary limits. There is a strong convergence with this reality and the desire of governments to not have a starving and restive populace. I am truly baffled as to why this simple conclusion is not only overlooked by Austrians, but not even acknowledged. As long as we have capitalism as the dominant class structure, we will have debt based fiat currency- and the resulting government intervention/manipulation. It seems really simple to me.

So I think that if I were an Austrian I would have to really have a few quiet moments outside of the echo chamber of King World news to consider whether a mode of production that requires endless growth to survive, is (and historically) demonstrated to be unstable, and is responsible for truly grotesque maldistribution of wealth, is this really caused by the use of debt based currencies and government intervention?

 

The smart money says no.

Arthur Robey's picture
Arthur Robey
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Give Corporate Rights to the Earth.

Maybe instead of corporations being people, the US Supreme court should deem it that the earth is a person.. then the earth would have some rights herself.

That nails it Jim. I am going to have it printed up on Tee shirts.

Corporations Aren't People, The Earth Is.

 

Jim H's picture
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Darbikrash

Thank you for the detailed response above.  To start with, the Universe dropped this into my lap just yesterday, so I thought I would pass it on  angry ;

Darbikrash said,

So I think that if I were an Austrian I would have to really have a few quiet moments outside of the echo chamber of King World news to consider whether a mode of production that requires endless growth to survive, is (and historically) demonstrated to be unstable, and is responsible for truly grotesque maldistribution of wealth, is this really caused by the use of debt based currencies and government intervention?

So more synchronicity insues... as I was reading your post, it occurred to me that, while I do continue to think, in disagreement with you, that the system dynamics of our debt-based fiat currency system (and the fact that the banks that run the place are harmed by deflation) are a primary motivator of the need for growth... there is another more fundamental driver;  exponential population growth, i.e. all of us!  Unless we come up with some new paradigms for living, vs. ideas like suburban sprawl... our population growth requires endless growth.  

The fact that Adam and Chris have served up the population growth topic in a separate post today makes me want to take this discussion over there.... 

http://www.peakprosperity.com/podcast/84314/bill-ryerson-challenges-pres...

 

 

 

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