Only through understanding debt based Fiat money can you really understand and appreciate Gold

Jim H
By Jim H on Sun, Feb 1, 2015 - 12:49pm

I am a passionate defender of holding Gold and Silver to preserve savings - as alternate forms of money that should be held outside the banking system.  For me the path to understanding and appreciating Gold has had little to do with the properties of Gold itself (it's mined at a certain predictable rate, it's scarce, it doesn't oxidize.. .blah, blah, blah).  Rather the path to appreciating Gold is through thoroughly understanding what debt-based fiat money is, what it's underlying creation mechanism is, and how it acts, both logically and historically, as a system.  Finally, it helps to see how our central bankers have morphed into central planners, and how the new-Keynesian group think, labelled aptly by James Grant of Grant's Interest Rate Observer as the, "PhD Standard" has allowed for the system to perpetuate to extremes (i.e. negative interest rates, derivatives exposure many multiples of world GDP) that would have been previously unimaginable.  

Debt based Money as a System;  Creation, Growth, and Destruction.

If there is one quote that sums up my thinking in this article, it is this one from Robert Hemphill, Credit manager of the Federal Reserve Bank of Atlanta in the 1930's (emphasis mine);

"If all the bank loans were paid, no one could have a bank deposit,
and there would not be a dollar of coin or currency in circulation.
This is a staggering thought. We are completely dependent on the
commercial Banks. Someone has to borrow every dollar we have in
circulation, cash or credit. If the Banks create ample synthetic money
we are prosperous; if not, we starve. We are absolutely without a
permanent money system. When one gets a complete grasp of the picture,
the tragic absurdity of our hopeless position is almost incredible, but
there it is. It is the most important subject intelligent persons can
investigate and reflect upon. It is so important that our present
civilization may collapse unless it becomes widely understood and the
defects remedied very soon."

Indeed, debt based money is the most important subject intelligent persons can investigate and reflect upon.  It is the good, the means by which most of us will save and store value from our labors.  When you create money as debt.. through the process of people, towns, states, companies, and countries taking out debt.. the system ends up having certain, predictable tendencies.  For one, total debt runs away from total money in the system because you are creating the principle, but not the interest (thinking in terms of the total system) to pay it off.  Secondly, because of the effect of compounding, which is the basis for the exponential function, debt based money systems are exponential.  This is both demonstrable and obvious.  

I can hear some folks saying, "I already reject the money system for my own reasons... I am a post-money enlightened person.. I don't need to think more about it." or maybe, "I don't have much money anyway - why should I care?".  But like the 9/11 story, the deeper you dig, the more you understand... to the point where understanding turns to epiphany.  We are hardwired, in evolutionary terms, to accrue stuff in order to increase our chances of survival .. be it food, money, or the karmic balance sheet good that accrues from giving in a gift economy.  We need some kind of system.. and you need to understand where you are coming from, and why it doesn't work, to plot a course to a more humane system that will allow us to survive on a planet with finite resources.  I don't know what that system is.. but (my hope is) it is not debt based fiat currency.  Real stuff, including Gold and Silver, will be the only bridge available to the next system.

I am writing this to reinforce what Chris has been saying recently - because on this matter, his words have been more clear and more strident than ever before.  As a subscriber I listened to his recent interview there and I found myself nodding in appreciation over and over;

"If you have a debt based money system, eventually it breaks... that's what compounding does"....... "They all end up with the same math problem - they go exponential"..... "The system of debt based money itself is not repairable. It's irretrievably, systematically, design flaw broken.  That's just the nature of the beast.  Nobody wants this to go down on their watch, so they kick the can".

As an aside, the dynamic instability of which we speak can be visualized through the following video - warning;  violent destruction.  As you watch the video, think of this quote;

  "There is no means of avoiding a final collapse of a boom brought about by credit expansion. The alternative is only whether the crisis should come sooner as a result of a voluntary abandonment of further credit expansion or later as a final and total catastrophe of the currency system involved."

- Ludwig von Mises

And this comment Chris made just today ties in to this theme;

....The banking industry has one major goal in life and that's to keep everyone convinced that defaulting on your debt is the worst possible thing, from which there's no recovery, as if the oceans would boil and the sun would not rise after a major default.

And I understand why...the system of control exerted by debt based money rests entirely on the perception that money conjured out of thin air is 100% real.  Bankers cannot afford to have people suddenly realize that our system of money is entirely fictitious, not based on anything real at all, but rather is just a very elaborate illusion.  

You and I have to work for our money, so it seems very real, but the banking industry just conjures it out of thin air each and every time it makes a loan.  Some will cling to the notion that banks lend out deposits, albeit at a fractionally reserved rate, but as the Bank of England discovered much to its amusing surprise last year banks lend whenever they've got a good loan to make, deposits be damned.....

Money is not just something we use and save.. something that is handy.  It has evolved into a system of control.  It is imperative as part of our awakening to understand this... because only through deep understanding can we individually summon the strength of will and conviction that it takes to break away from the herd.. from our banker fascist programming.  What do I mean?  I will give you some examples that I have experienced;

*  Tell your broker that you want to invest in some Gold and Silver.. they will reflexively recommend the GLD and SLV ETF's.  Do you know enough to counter them and direct them differently?  Do you know enough to explain to them that you don't want your well intentioned Gold and Silver investment money to go down the Wall Street blood funnel.. that you are actually trying to move away from this?

*  Tell your accountant that you are planning to stop putting more money into your 401K because you feel it is better to take the after tax money and buy PM's regularly with it... they will tell you that your crazy and that you are losing your company match.  Are you crazy?  Can you explain to them why you are not?

*  Tell your accountant that you are going to withdraw your money from an IRA, 401K, or other Gov't retirement savings vehicle, and are willing to pay the penalty to do so, in order to buy a rural homestead.  Your accountant will tell you that you are crazy... that you could "own" the property within an IRA and not pay the penalty, or any taxes at all for that matter.  Do you know enough to make the case for direct ownership vs. leaving the property in an IRA?  

*  Tell your friends, many of whom may be subject to media programming about the evils of guns, that you have become a strong advocate for the 2nd amendment.  Why?  Because the money system is going down.. and the results will be quite unpredictable.. that's why.  

*  Making that first foray into precious metals ownership is tough... I have some friends that have been talking about doing it for years but never have.. what if it goes down?  How do I store it?  Isn't that dangerous?  The fact is, almost any concern you can raise about Gold or Silver pales in comparison to the rocks that lie dead ahead for our ships of unbacked, debt-based fiat money.

Final Thoughts

It is not by accident that very few people can explain what our money is, or how our money system actually works. The continuing success of the system depends on our ignorance.  I had the opportunity last year to sit down with one of the Research Division managers of the Fortune 50  tech company I work for - he was part of a team exploring the future implications of Bitcoin.  What I found was this;  His view was completely sterile - he understood Bitcoin as a technology, but had no idea what our current money system is, and hence no idea how Bitcoin contrasted in so many important ways.  He did not know that our money is debt-based.

I almost break out laughing every time I hear a pundit, or a political or monetary leader state that the system has not broken yet hence we should be confident it won't break in the future.  This is about the only argument they can drag out anymore.  Meanwhile, the extremes become... well.. more extreme;

And just like that, first in Denmark, and soon everywhere else in Europe, a situation has now emerged where savers who pay the bank to hold their cash courtesy of negative deposit rates, are directly funding the negative interest rate paid to those who wish to take out debt. In fact, the more debt the greater the saver-subsidized windfall.

That all this will end in blood and a lot of tears is clear to anyone but the most tenured economists, however in the meantime, we can't wait to take advantage of the humorous opportunities that Europe (and soon Japan and the US) will provide in the coming months, as spending profligacy will be directly subsidized and funded by the insolvent monetary system, while responsible behavior and well-paid labor will be punished, first with negative rates and soon thereafter: with threats, both theoretical and practical, of bodily harm.

And what about those, "tenured economists"?  Where are they, and why aren't they waving red flags left and right?  It's simple really.. they have been captured in a self-referential system of dogma, reinforced by FED money raining down through research grants on their institutions both academic and private.. they have become new Keynesians.  Most of us are never taught what is going on... and face a steep learning curve and resistance on many fronts as we do awaken.. while those of us who should know better are taught that their salaries depend on their understanding something different. 

The Keynesians are like deluded members of a Cargo Cult. They ignore the reality of debt, rising interest payments and the resulting debt-serfdom in their belief that money spent indiscriminately on friction, fraud, speculation and malinvestment will magically call back the fleet of rapid growth.

To the Keynesian, a Bridge to Nowhere is equally worthy of borrowed money as a high-tech factory. They are unable to distinguish between sterile sand and fertilizer, and unable to grasp the fact that ever-rising debt leaves America a nation of wealthy banks and increasingly impoverished debt-serfs.

The Keynsian Cargo Cult relies on an essentially magical belief that government give-aways will raise "aggregate demand," the "animal spirits" demand for more of everything, which will magically increase productivity, wealth, etc.

Got Gold?  Got solar?  Got gardens?     



davefairtex's picture
Status: Diamond Member (Offline)
Joined: Sep 3 2008
Posts: 5740
just one nit

Agree with most of it.  Just one nit:

When you create money as debt.. through the process of people, towns, states, companies, and countries taking out debt...

The only way bank credit ("money") is created is via a bank loan.  When companies, states, and countries issue bond debt, that doesn't create bank credit, it just moves the existing bank credit around - from the account of the bond buyer, to the account of the bond issuer.  If those same entities borrow money from a bank, then definitely, new (bank credit) money is created.

With bond debt, the interest payments are still due, the principal must be paid off, its just as big a burden on society, and it is also inflationary (due to the fact that the resulting transferred money gets spent right into circulation instead of sitting on deposit at a bank somewhere), but the act of issuing the bonds doesn't actually create new bank credit.

Perhaps this is too much of a technical detail?

I think gold is awesome because its concentrated portable wealth that has no default risk to it.  Remember my example of oil: one pound of gold = 50 tons of oil.  Good luck swimming the Rio Grande carrying all that oil on your back...

The thing that perplexes me, is why people looking for safety would prefer to buy a 2 year swiss note and actually have to pay interest each year, instead of buying gold.  The bonds seem like such a bad deal.

Jim H's picture
Jim H
Status: Diamond Member (Offline)
Joined: Jun 8 2009
Posts: 2391
You are right, and you are wrong Dave...

In the old days, before QE.. you are absolutely right Dave.. most borrowing done by Towns, Cities, States and Countries was done via bonds which were bought using funds from the existing supply of money.  QE of course turns this on it's head.  Now the central bank can create thin air money, and if you are Japan, they can go out directly and buy sovereign debt, or if you are the FED, you need to do a little three card monte via the primary dealers.. but the effect is the same.  QE effectively allows sovereign debt. to play a role in the money creation mechanism... the sovereigns have become the money creating borrowers of last resort in a system that is otherwise debt saturated.  As John Rubino has noted, the bond bubble will be the last bubble. 

Real end game stuff as we watch the bond curves of Japan and now European nations dip farther and farther into negative rates.                 

Arthur Robey's picture
Arthur Robey
Status: Diamond Member (Offline)
Joined: Feb 4 2010
Posts: 3936
The Monkey on our backs.

I cannot follow your argument Dave. I am just a humble nuts-and-blots electrician. What I do know however is that debt/money has neutered all union bargaining power. Without the threat of real consequences management is free to misbehave. 

Individuals in the labour force are so enmeshed in the whole debt illusion that they do not have the resources to indulge in unpaid holidays.

All suffering is due to illusions.

Or words to that effect. From Monkey.

davefairtex's picture
Status: Diamond Member (Offline)
Joined: Sep 3 2008
Posts: 5740
bonds & credit money


The difference between bonds and a bank loan is really simple:

Imagine for a moment you borrowed money from me.  What happens?  Money goes from my pocket to your pocket, and I receive a paper IOU from you.  No money was created, it was just transferred.  With bonds, it is identical, except the IOU is a bit more formal.  Note: I had to have the money in my pocket before this can happen.  That's what I mean when I say, "borrowing money using bonds doesn't create bank credit."  The money had to be there before the transaction could go through.

Banks are special though.  If I borrow money from a bank, that bank creates the money, and then hands it to me.  The money did not have to be there for the transaction to go through.

It all reminds me of a superhero power.  They even have an origin story too.

@Jim- wasn't sure you wanted to get into the added complexity of the QE story, but I agree there too; central banks create (bank credit) money when they buy debt assets, just like regular banks can create (bank credit) money via bank loans.

To see how much total bank credit money there is in the system, you can go to FRED and it will tell you.  The timeseries is LOANINV (seasonally adjusted) or LOANINVNSA (current numbers).

And here is a version in table form - you can see the different types of bank credit created by various borrowers, all under the general heading of "bank credit."

Jbarney's picture
Status: Silver Member (Offline)
Joined: Nov 25 2010
Posts: 233
Always Appreciate the Perspective Jim


Jim H....thanks for all that you do in trying to convince skeptics about the problems with our debt based money system.  I would comment more, but I would just direct anyone with questions to re-read what you just wrote above.  Rarely has it been stated or organized any better.



sand_puppy's picture
Status: Diamond Member (Offline)
Joined: Apr 13 2011
Posts: 2074
Awesome explanation

Jim H,

Thank you so much for laying this out so clearly and taking the time to write.  And DaveF, I appreciate your explanation of the difference between a bond and a bank loan (in a non-QE setting).

Rector's picture
Status: Platinum Member (Offline)
Joined: Feb 7 2010
Posts: 518
Much appreciated

A contribution that is worthy of publishing somewhere! As we fly along in the Hindenburg drinking mimosas, it's sometimes easy to forget where this is headed. The road to wealth preservation is narrow and few will find it. Thanks Jim.


cmartenson's picture
Status: Diamond Member (Offline)
Joined: Jun 7 2007
Posts: 6035
Well done JimH!

Thank you for this article, Jim.  

A central point is this:  

Money is not just something we use and save.. something that is handy.  It has evolved into a system of control.  It is imperative as part of our awakening to understand this.

All cultures have systems of control.  Some use burkas, others shame and guilt, and others strict codes of personal conduct.

Debt-based money is a terrific enforcer of certain behaviors and an absolutely brilliant form of control.  

"None are more hopelessly enslaved than those who falsely believe they are free."

          - Johann Wolfgang von Goethe

When in debt, individuals, companies and countries willingly believe that their success depends on paying that money back.  So powerful is this belief that farmers will farm in a way that they know ruins their soil, fishermen will destroy fishing grounds, and companies will dump toxic wastes into rivers.

People do things to escape their debts that they would never willingly do on their own if their conscience was guiding them.  It happens every single day.

While debt-based money does a terrific job of assuring that we each contribute to the ideology of relentless growth, it has it's own demise tucked safely within its design.  That's what is breaking down all around us now as we watch the horror of the system reacting to Greece's calling a spade a spade by declaring their unpayable debts to be unpayable.

It's only a very short hop, skip and tiny jump from Greece's situation to the larger conclusion that virtually all of the developed nations share the same broken math and then a slightly larger leap to the conclusion that endless growth itself is an impossibility.

As systems of control break down, whether it's because a monarchy has degraded into opulent carelessness or because the logical underpinnings of your system of money are revealed to be insane, you find the same progression of social emotions and events.

Ignorance gives way to dawning awareness > discomfort > anxiety > anger > anarchy > chaos > rebirth.

The first step in protecting yourself to the extent that one can, is by understanding the nature of the system that is breaking down and why it is happening.  That's why I loved Jim's post so starts with the system itself and the Hemphill quote.

Bankers Slave's picture
Bankers Slave
Status: Platinum Member (Offline)
Joined: Jul 26 2012
Posts: 523
Blown away as usual.

Thanks for this great post Jim H. The Hemphill quote alone is worth its hypothetical wake up the sheeple weight in gold.

I will be forwarding this to the very few that listen to what I say these days. No doubt the humoring will continue unabated. Cannot say I did not warn them.

Excellent replies from the posters here also. 

RoseHip's picture
Status: Silver Member (Offline)
Joined: Feb 5 2013
Posts: 150

All suffering is due to illusions.

Isn't buying/owning gold/silver just a different form of the same illusion?

You spell it out beautifully but then advocate for the similar? Please help me understand the logic.

sand_puppy's picture
Status: Diamond Member (Offline)
Joined: Apr 13 2011
Posts: 2074
Debt: Abandoning Aspirations

My niece was a passionate advocate for poor Africans.  She went on church missions every summer to Africa and learned Swahili as her foreign language.  She applied to medical school following the dream of becoming a missionary doctor.

Unfortunately, the $200,000 medical school debt changed her career direction.  She has decided she must stay in the USA "for about 15 years" while she and her husband pay off her school loans.

Comment viewing options

Select your preferred way to display the comments and click "Save settings" to activate your changes.
Login or Register to post comments