Like the US, China too got fat on fake money. Sooner or later the bill arrives
Bill Bonner Columnist
The thing that doomed the American empire more than any other was its currency. When the US substituted a fake, paper-only, dollar in 1971, it set in motion a financial doomsday machine. For a long time, it seemed to Americans and foreigners alike to be a blessing, an “exorbitant privilege”. We didn’t have to make things; we could just print money. Since the dollar was the world’s “reserve currency”, other nations took it willingly and even lent it back to us by buying more of our bonds.
But now, the great weakness of paper money is (once again) becoming apparent. Since it can be produced at will, it can also be lent out at will – but in a crunch, it gives way. When the US switched from an asset-backed money (dollars backed by gold) to a credit-backed system (dollars backed by an IOU from the US government ) it lost its anchor.
Gold is limited – and precious. People are careful with it. And when the wind picks up, it holds fast. Typically, in a correction or a crisis, prices fall and money becomes more valuable. People discover they’ve made mistakes. Those who’ve put their faith in promises and speculations lose money. Asset prices fall. And those who have real money can buy up the distressed assets and get back to work. In a fake money system, however, the money reserves at the heart of the system – “invested” in US bonds – don’t become more valuable; they disappear. US banks have some $685bn in unrecognised losses. These reserves were not really a solid asset, but a dubious credit, in which the world’s largest debtor promised to pay its debts with its own fake money. Now, in a pinch, they discover that they aren’t worth what they paid for them.
What can banks do? For now, it’s “don’t ask, don’t tell”. They’re hoping the Fed will lower rates this year; then, things will go back to “normal”; the value of their bonds will go back up. In other words, the only way a fake money system can hold together is for the Fed to create more of its fake money, and lend it out at fake rates. Inflate – and make the next crisis worse.
That is not just a problem for the US. It’s also a big problem for its fellow delusional, China. Americans thought they could buy things they couldn’t afford, using t
