Jubilee by Robert Gore for Straight Line Logic

The debt dam is crumbling as central bankers and government officials frantically refill the escaping lake with eye droppers.

As background to this article, it would be helpful to read an article I wrote in 2015, “Real Money.”

The foundation of the world financial system is debt. Every currency in the world is debt whose value is not tethered to any real value. In a rare display of official truth-in-packaging, right there on the instrument itself a US dollar bill tells you it’s debt: Federal Reserve Note. A note is a debt. What do holders of Federal Reserve Notes, officially creditors of the Federal Reserve, get for repayment of the debt they hold?

Federal Reserve Notes have no maturity date, pay no interest, and can never be redeemed. If you go to a Federal Reserve branch and try to redeem one, they will either not accept it or they will exchange it for an identical Federal Reserve Note. Why would anyone accept this peculiar instrument? Because you cannot refuse it. Also right there on the dollar bill it says: THIS NOTE IS LEGAL TENDER FOR ALL DEBTS, PUBLIC AND PRIVATE. For American transactions, it’s reject the dollar, go to jail. The American government even levies punitive measures on foreign governments that just say no.

Because central banks and governments can repay their debt with more of their own debt, they have been unconstrained in the amounts they produce. You and I would do the same thing if we were so empowered. Governments, central banks, and debt are a ménage à trois from hell. The US ménage has debased the currency’s value against real goods and services at least 95 percent since the establishment of the central bank in 1913. The ménage’s ill-gotten gains are someone else’s loss—gullible savers and creditors who believe promises by politicians and central bankers that they will not engage in the debasement they have every incentive to promote.

Promoting debt in the public sector, the ménage also seeds it in the private sector. It should surprise no one that central banks tend to favor the politically popular and fiscally friendly (to the government) course of suppressing interest rates below where purely market-determined rates would be.

They are also a ready market for their governments’ debt, a process often mistakenly called monetizing debt. It’s really just an exchange of central bank debt for government debt. If you read “Real Money” you know that no money and consequently, no monetization, is involved. It should be called debtizing debt, but debtize and debtizing are not words. We’ll use them anyway. By having the central bank debtize its debt, the government avoids pushing up interest rates and crowding out private borrowers in the credit market, thus encouraging more private borrowing.

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Robert Gore

Robert Gore was born in 1958 in Livermore, California. He grew up in Los Alamos, New Mexico, where both his parents worked for the Los Alamos National Laboratory. His undergraduate education was at UCLA. He graduated in 1980 summa cum laude and Phi Beta Kappa with a double major in economics and political science. He completed the JD/MBA program at UC Berkeley in 1984. He held part-time jobs throughout undergraduate and graduate school. He passed the bar exam and is an inactive member of the California Bar Association. Mr. Gore’s career in finance began in 1984 with a bank in San Francisco, trading municipal bonds. In 1985, he went to a Wall Street firm’s west coast municipal bond office in Los Angeles as a bond trader. He developed its block and institutional sales capabilities and after four years was promoted to manager of the region.