When Debt Masquerades as Money

There is an amazing amount of confusion, or more accurately obfuscation, in the world of money, finance, and economy. The ‘powers that be’ at the Fed and the Treasury claim that one needs at least a PhD, if not a Doctorate to understand what is going on in the economy.

This is the worst kind of rubbish possible! At bottom, at the root, economics is actually simple, easy, and ‘common sense’. To clarify our understanding, we just need to have a clear grasp of a few basic concepts and the words used to describe them. For example, there is much talk about ‘debt money’… but this is a grievous contradiction in terms… debt and money, like fire and water, are poles apart. Just as water extinguishes fire, so money extinguishes debt.

Let us define debt and money before going any further…

‘Debt; the exchange of a present good for a future good’.

‘Money; that which extinguishes all debt’.

To understand what these definitions mean in real life, let’s look at a simple example of credit… or debt. Suppose I call my friend Joe and ask to borrow a pound of sugar; he agrees, and I write him an IOU that says ‘I owe you’ a pound of sugar, and I promise to give it back next week when I go shopping.

I am now in debt to Joe for a pound of sugar, or what is the flip side, Joe has extended me credit in the form of a pound of sugar. The sugar is a present good, and the IOU or debt paper, a future good… the promise of a present good. Come next week, I give Joe back the sugar, he rips up the IOU which is now fulfilled, and the debt has been extinguished… by the present good… as promised. Pretty simple and straight forward. So far, I don’t see any need for that PhD.

But suppose I forget to buy sugar, and when the debt comes due, I cannot pay it back; instead, I anxiously call my friend Jill, ask her if she has a pound of sugar, and if she is willing to lend it to me; she says yes, so I give Jill’s sugar to Joe, and transfer the IOU to Jill… to whom I now owe a pound of sugar.

Clearly Joe is out of the loop, that is he has been ‘paid’… but the debt has NOT been extinguished, merely transferred… I now owe the pound of sugar to Jill. This is exactly how so called ‘debt money’ operates; debt is merely shuffled around, never extinguished. More on this in a second, but the question is since sugar extinguished debt, should it be considered ‘money’?

Remember, the definition says money extinguishes ALL debt, not just some debt. If the debt your company owes you for your week’s work were to be paid to you in sacks and sacks of sugar, you would not be a happy camper… or if you tried to buy a TV set and showed up at the electronics store with sacks of sugar, you would not get very far. Sugar is a commodity, an item of positive value, a present good… but it is not money. It is not able to extinguishing all debt. To understand his concept, one does not need a Doctorate … does one?

So, how does ‘debt money’ operate in today’s world? Very simple; the Fed or any other central bank issues ‘notes’ called Dollar bills, or Euros… and these bank notes represent a liability on the bank’s books, just as my sugar IOU is my liability. When we ‘pay’ a debt with Dollar bills, or any other bank note, we are NOT repaying or extinguishing the debt, merely shuffling the Fed’s IOU’s to someone else. Debt is not extinguished, merely transferred.

Of course, it is not very clear as to what the bank note is promising to pay, unlike the sugar IOU that promises a given quantity of sugar. The reason for this lack of clarity? The simple fact that that the bank notes are fraudulent. They are promises to pay… nothing.

This is in sharp contrast to the meaning of bank notes before WWI, when the world was still on the classical Gold Standard. Back then, it was perfectly clear that bank notes were IOU’s that promised to pay money (Gold). In a word, bank notes were redeemable in real money.

All this changed drastically before WWI. The powers that be knew that a major war would be enormously expensive; as the prospect of war hardened, the ‘great powers’ started to recall their Gold, in effect calling their debts, and filling their treasuries. The Gold thus accumulated was substantial, but not nearly enough to finance a major war.

This was well understood; the pundits at the time predicted that a major war could not last more than a few months at best, as all the combatants would drain their treasuries, and run out of money (Gold) to finance a long war. In anticipation of this, ‘legal tender’ laws were passed, first by France then by Germany… laws decreeing that bank notes were to be considered… money! By waving a magic wand, Governments supposedly turned IOU’s into money. The legal tender laws were the first nail in the coffin of the classical Gold Standard.

All this chicanery was well disguised, and Gold coins continued to circulate alongside Gold; indeed banks still exchanged paper notes for Gold on request… for a while. By the nineteen thirties, this was no longer true; Roosevelt forbade American citizens from even owning Gold. This decree was the third nail in the coffin… the second nail was the destruction of Gold’s clearing system, the circulation of Real Bills.

Real Bills financed multilateral trade under Gold, at the lowest cost possible. In preparation for war, multilateral trade was destroyed. Sadly, once the war was over, neither was ‘legal tender’ legislation repealed, nor was multilateral trade and Real Bills circulation allowed to resume. The paper system rolled on… then Nixon put the last nail in the Gold Standard coffin by defaulting on US Gold obligations.

The remaining question is; what assets offset the liabilities in the Treasury’s balance sheet today? Before WWI it was Gold… but not today. Are these assets something else of real value, present goods like Gold is…? No, the assets of the Treasury today are the “Full Faith and Credit” of the US Government. In our topsy-turvy world, Faith and Credit are called assets!

But what does all this really mean? The assumption is that the government, with its ‘unlimited’ taxing power, can always pay back its debts… eventually. Or at least, the belief is that it can and will do so. In reality, Treasury debt is assumed in the name of tax payers, without their consent… in effect, once the debt becomes large enough, realistically unpayable, taxpaying citizens are enslaved. They have no say in the amount of debt assumed in their names… all their future labor is confiscated to pay these onerous debts. This is the very definition of slavery; working for a master, at the point of a gun, for the Master’s benefit!

But the issue goes beyond this; because debt is masquerading as money means that any statement using the word ‘money’ needs to be restated, using DEBT where the word money is now used. For example, there is a lot of talk about money supply, like the ‘growth of the money supply’… this needs to be understood as ‘growth of the debt supply’. The fanciful monetarist statement that inflation is a case of ‘more money chasing less goods’ needs to be restated as; ‘more debt chasing less goods’. Well all this is bad enough, but unfortunately reality is even worse than this.

The very mechanism of ‘money creation’ is synonymous with ‘debt creation’. If money is debt, it must by definition be borrowed into existence; else it would not be debt. This implies that if debt were ever to be repaid, rather than just shuttled around, then the money that debt pretends to be would disappear. If debt is money, the disappearance of debt equals the disappearance of money. This is logically inevitable, and it underlies the death spiral of catastrophic deflation that the ‘powers that be’ want to avoid at all cost. Retiring debt equals retiring money… after all, money is debt, right? The logic is clear;

If debt = money, then 0 debt = 0 money

The cost of avoiding such deadly deflation is very high indeed; more and more debt needs to be created to avoid deflation. This is true because debt is never extinguished, and new money needs to be created to pay interest; new money equals new debt… and even more interest payments. Sooner or later the debt growth becomes totally unsupportable by the real economies of the world. The interest payments mount until all wealth must be used to simply pay interest. We are fast approaching this point. The debt growth curve is not linear, is not geometric, but is exponential… the famous hockey stick curve… and we are well up the handle.

If deflation is avoided by printing ever more debt… er ‘money’… then the value, or rather purchasing power of all this ‘money’ soon reaches zero. This is the hyperinflationary blowout that is the only possible alternative to deadly deflation… if there is no systemic change. To stop this disaster, the masquerade of debt as money must stop; something of positive value must replace debt (negative value) as money.

Just as sugar can extinguish debt, and retire IOU’s, money of positive value must be used to retire or extinguish all debt. Five thousand years of human history as well as innumerable technical reasons insist that real money, the ultimate extinguisher of all debt, is Gold.

Rudy J. Fritsch

Editor in Chief

The Gold Standard Institute

About Rudy Fritsch

I was born in Hungary in 1947, and fled Socialist tyranny during the Hungarian Revolution of 1956. My family had lived through WWII and the consequent Hungarian hyperinflation, thus I have intimate experience with financial destruction. My Dad used Gold to buy our way out of Hungary. Paper money was as good as toilet paper. Later in life, during my studies of Austrian economics, I came to realize that only Gold could solve the Global Financial Crisis (which should be called the Global Monetary Crisis), just as Gold solved our otherwise insoluble problem of getting out of Communist Hungary.
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