Main page

Why the economy and the banking system cannot be reformed

I realise now that the monetary system and the banking system cannot be reconciled from the present precarious position, and here is why: Naturally if the currency is asset-backed that would prevent making good on the misallocations because gold cannot be printed. Money being nothing more than paper allows the possibility to replace the credit with paper notes and make good on the bad debts. This, ordinarily would repair the system to the best extent possible except that it would alert people to the fact that money is nothing more than paper and has no intrinsic worth anyway. People would then find no other reason to value paper and the price of money would fall, leading to hyperinflation. Hence this is not a viable option since there is no other reason to value paper. So they must continue to paper over the cracks and hope that it stays on its feet and people don't realise that paper is worthless. If the public doesn't test the system with a bank run (which must happen eventually, perhaps, even if they don't realise that paper is worthless) then it will carry on in this state until they realise about the paper. They can't be prevented from realising about the paper.

The public cannot be allowed to realise the truth of the fact that money is backed by nothing, which means replacing the credit with cash is impossible. Then we are left with the unstable system which would either collapse or be forced into replacing the credit with cash (which would reveal the emptiness of the currency, that it is backed by nothing) when there is a bank run. If they do not replace the credit with cash, we have massive deflation and a broken banking system leading to disquiet and unrest, similar to Argentina. Even if there is no bank run a realisation of the reality of the currency might come sooner and lead to hyperinflation. They can't print because that exposes the flaw. They can only wait until they find out the banks are empty (and you get a big crash) or they decide they no longer like paper.

The monetary system must fail because to save it would require replacing credit with cash which means printing lots of money and would reveal with transparency the "emptiness" of money, that it is not backed by anything. To reveal this so plainly would lead to hyperinflation as there is no reason to value money in its present form. So the only option is to wait for the banking system to crash (without the ability to remedy it even then, because to do so would cause the same problem of exposing the nature of fiat currency) and perhaps hope that the day that there is a widespread bank run if far away. Even before that date the public could wake up to the fact that money is backed by nothing which ends the currency with a hyperinflation as paper typically does not cost very much.

Even after a default, fiat money is still fiat money and does not become backed by anything.

11th August 2009






This blog is now closed, it (the economy) is beyond reforming... although one blogpost is preserved for posterity: click here