Money, Credit, Growth and Depression: It’s Complicated, by Charles Hugh Smith

Conjured money and conjured debt don’t produce real growth. From Charles Hugh Smith at oftwominds.com:

If “growth” is all that matters, that leads to depending on credit and asset bubbles, which are self-liquidating in ways few see because, well, it’s complicated.

Many people anticipate the demise of fiat currencies, for good reasons. This is the motivation for calls to return to the gold standard–currency backed by the tangible value of gold–or the equivalent use of bitcoin.

What few seem to ask is: why did authorities embrace fiat currencies in the first place? What prompted them to replace a gold-backed monetary system with a fiat currency system?

Were they misled by monetary theories, or delusional, or merely desperate?

Let’s consider the complications of money in a system that demands “growth.” As I noted in my recent post for subscribers, Not What We Expected: Why Our Fixes Will Fail, if banks are allowed to originate loans based on reserves–fractional reserve banking–then most of the “money in circulation” is created not by adding gold or bitcoin to the system but by originating mortgages, commercial credit, etc.

If credit is limited to loaning out a percentage of cash deposits, credit becomes scarce, and everything that depends on abundant, affordable credit–vehicle sales, real estate purchases, college diplomas, consumer credit–all dry up and blow away. This collapse of “growth” is called a depression. Without credit, assets collapse in value, savings are depleted to pay bills as employment shrinks, and so on.

This is why the early American economy was starved for credit: everybody wanted to do something great but they had no access to the money needed to do something great. Banks arose and failed, wiping out savers and borrowers alike, as loans were called and assets were liquidated for pennies on the dollar.

So how do you expand credit without expanding money in circulation? You can’t, as credit-money is money, period. So $1 billion in gold or bitcoin backs the money supply, but what happens when banks issue $10 billion in mortgages and loans, money that is created out of thin air and enters circulation? Every dollar that was backed by X quantity of gold or BTC is now backed by 1/10th of X.

Then there’s foreign trade. If imports and exports don’t zero out–$1 billion in imports is balanced by $1 billion in exports–then the balance is paid in gold. Nations running trade deficits eventually run out of gold.

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