Faith and Credit
To better comprehend the breadth of the evolving crisis we need to examine the two premises that fiat money is founded upon.
Faith defined: (from Merriam-Webster Online)
1 a: allegiance to duty or a person: loyalty b (1): fidelity to one's promises (2): sincerity of intentions
2 a (1): belief and trust in and loyalty to God (2): belief in the traditional doctrines of a religion b (1): firm belief in something for which there is no proof (2): complete trust
3: something that is believed especially with strong conviction; especially: a system of religious beliefs
Credit defined: (from Merriam-Webster Online)
1: reliance on the truth or reality of something
2 a: the balance in a person's favor in an account b: an amount or sum placed at a person's disposal by a bank c: the provision of money, goods, or services with the expectation of future payment ; also : money, goods, or services so provided d (1): an entry on the right-hand side of an account constituting an addition to a revenue, net worth, or liability account (2): a deduction from an expense or asset account e: any one of or the sum of the items entered on the right-hand side of an account f: a deduction from an amount otherwise due
3 a: influence or power derived from enjoying the confidence of another or others b: good name: esteem ; also: financial or commercial trustworthiness
4 archaic: credibility
5: a source of honor
Why does this matter?
I believe the key to understanding our financial crisis is to understand the consequences of the State not living up to faith and credit with a fiat currency. By increasing the money supply and interfering with demand for money (setting interest rates by a Federal Reserve or Bank of Canada) the financial toxins in our system have built up to levels that threaten to fatally poison our society.
The Chinese and Japanese, savings oriented countries that buy much of the debt of other nations realize their collateral (bonds and currency) is in danger of devaluation. Notice how the Chinese have been stockpiling hard assets like commodities (iron ore, gold, and copper) and buying controlling interest in companies that produce commodities. (See June 23 article "Dumping Fiat Currency" in blog) These strategic moves are designed to buffer their nation from the growing crisis.
The issue remains one of national insolvency in the US and several European countries. The Chinese are losing "faith" that the "credit" of major debtors is sound. We can expect that the interest that foreigners demand will increase as the insolvency issue becomes clearer.
Now we have CNBC mocking bloggers for expressing their views that stand in contrast to the stock market cheerleaders who convince so many to place their faith, money and retirement hopes in investments that are high risk at best and speculative at worst. It appears that much of the mainstream media is not concerned with balanced reporting, only with promoting the popular idea of the day.
The response to the crisis from governments around the world has been most disappointing. Rather than face the reality of excessive debt and consumption, the solution is more consumption. Vice President Joe Biden says, "we have to spend money to keep from going bankrupt". Sometimes it seems like government representatives have become cartoon characters.
This comment reminded me of one uttered more than half a century ago in Europe.
"It is the absolute right of the State to supervise the formation of public opinion...If you tell a lie big enough and keep repeating it, people will eventually come to believe it. The lie can be maintained only for such time as the State can shield the people from the political, economic and military consequences of the lie." Joseph Goebbels
Am I mistaken, or is there a growing pathology as the State becomes more powerful?
Consider something Hoover said after the start of the Great Depression.
"Every collectivist revolution rides in on a Trojan horse of 'emergency'.
It was the tactic of Lenin, Hitler, and Mussolini. In the collectivist
sweep over a dozen minor countries of Europe; it was the cry of men
striving to get on horseback. And 'emergency' became the justification
of the subsequent steps. This technique of creating emergency is the
greatest achievement that demagoguery attains."
(1874-1964), 31st US President
By now it is apparent that the $700 billion plus bailout has failed. The emergency was created and rammed through congress. The deficit has grown so huge this year it is difficult to fathom. Where do we stand?
Unemployment U3 – 9.8%
U6 – 16.2% and rising.
Have the issues of excessive credit and leverage been addressed?
Have the people in the Federal Reserve and Treasury and elsewhere who contributed to the problem been disciplined or dismissed or in the case of Major Banks, been forced into bankruptcy?
When will the Chinese and other creditors lose enough faith that they start to insist on lending to the United States only in their own currency the Renminbi rather than US Dollars? And what will be the impact on the US dollar and interest rates when that happens?