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Uncontrollable debt

Is it possible to understand the debt situation behind the crisis in Greece? Ny Tid looks at some simple economic contexts.


On Monday 6 July, it became clear that the Greek people did not want to follow the cuts and reforms The International Monetary Fund (IMF) and the EU are demanding in order for the country to receive further loan financing. What the Greeks have actually said no to is a continued humiliation. The loans granted to Greece have helped the banks – not the people. In the last five years, Greece has experienced more than 10 suicides. Many people have also lost their lives because people have not been able to afford the necessary medicines. Greece could possibly convert to drachmas, the country's ancient currency, to pay salaries and pensions. What will then happen is that the drachma will fall in value, which in turn may lead to Greek goods becoming very competitive. In another debt situation, this can have positive consequences for both exports and tourism in the country.

Debt or realia. Throughout history, gold, silver and other real assets have been used as a means of payment, but gold is the real asset that has been most suitable for this purpose.
Athens in the year 600 BC was the first civilization based on a free market and a gold standard. Athens is described by many as the "cradle of democracy," and used the free market and gold as a means of payment to achieve impressive growth and prosperity for hundreds of years – until the greed of war and war broke out. The authorities' investments in grandiose, fantastic buildings and financing of ever-increasing wars became Athens's end.
Since that time, history has repeated itself many times, and it always proceeds as follows:
A society based on real money – either gold or silver or embedded in these materials – is evolving and growing socially and politically. As growth increases, the power holders are increasingly undertaking politically motivated infrastructure investments and costly social reforms. The economy is growing further, and so is the political influence of power holders – and the public budgets of the military, among others, are rising. Finally, the costs of bureaucracy and the military explode.

The admission of paper money. From now on, things escalate slowly but surely: in order to finance more and more social reforms and wars, those in power steal the wealth of the people through taxes and fees. Here also occurs the point where they exchange gold and silver money with paper money that can be printed in unlimited quantities. Then a new, decisive phase occurs: when the loss of the purchasing power of paper money is finally and inexorably discovered by the people. Here the monetary system loses all confidence.
Then comes the last step in the process: A massive flight from worthless paper money leads to an economic collapse.
The same story has been repeated many times over the last couple of thousand years. A "fiat" system, or paper money system, has an average lifespan of 35 years and never survives.
The United States, Europe and large parts of the industrialized world are now at the end of the penultimate phase of the outline above – that is, where the monetary system's confidence evaporates.

Independent. Perhaps the most brilliant economist the world has ever had, Ludwig von Mises, believed that monetary and fiscal policy had to be governed by a gold standard – that is, paper money must be tied to a given amount and redeemable in gold. Mises stated the following: "The gold standard has an invaluable property: the amount of money under a gold standard is independent of state influence and political parties."
By this, Mises meant that without a gold standard, politicians and public bureaucracy would succumb to the temptation to print paper money to fund social reforms and welfare, thereby satisfying their various interest and voter groups. In 1971, President Nixon declared that the United States was moving away from the gold standard, and the world has since squeezed a lot of money to achieve growth and prosperity. What we have forgotten is that paper money is the same as debt, and that this debt must one day be repaid by you and me, our children and grandchildren (see "The coming economic collapse", Ny Tid 15.05.).

The privately owned central bank Fed. On a cold November day in 1910, four of the most influential people from some of Wall Street's most prestigious banks snuck aboard Senator Aldridge's private train at Grand Central Station in New York.

Lenin, Hitler and Mussolini introduced a ban on gold ownership in private hands.

Everyone used fake names. The trip went to Jekyll Island in the state of Georgia. They called themselves "First Name Club". None of the participants spoke about the meeting on Jekyll Island until 20 years later. The work associated with the establishment of the US Federal Reserve was kept secret for over three years. Necessary legislation to introduce The Federal Reserve Bank (The FED) was approved by the US Congress just before Christmas 1913, after many of the representatives had already gone home to celebrate Christmas. Since then, the United States and the rest of the world have become dependent on the monetary and fiscal policies of the privately owned central bank The Fed. Since 1971, and especially after the "financial crisis" in 2008, The Fed has been a driving force in a money-printing regime the world has never seen before.
History tells us that the leaders of the largest banks – whether in the United States, Europe or elsewhere – hold secret meetings with their respective central bank governors, just before or after a financial crisis. The purpose of these meetings is always the same: to achieve special treatment in the form of vital rescue operations, always at the expense of depositors and taxpayers. That is what happened in 2007–2008 in the United States, and that is what is happening today through so-called "quantitative easing" under the auspices of the European Central Bank (ESB – see "Defense Letter to the Greek People", Ny Tid 10.06.).
When The Fed, ESB and Norges Bank print money via the banking system, they issue a promissory note on behalf of the citizens. Current and future generations must repay the debt. Public statistics show that each newly printed dollar (debt) gives a return of one to two cents – that is, almost equal to 100 percent negative return. For the euro, the figure is probably worse, since Europe is struggling with negative growth. The ECB's crazy money pressure is thus the reason why you and I, our children, grandchildren and great-grandchildren have to struggle with a debt burden we will never be able to make up. Had the world's central banks and financial markets been bound by a gold standard, this insane indebtedness would never have taken place.
The graph (see illustration) shows what the US Federal Reserve has been doing since the US left the gold standard in 1971. As we can see, money printing exploded in 2008.
When the world went off the gold standard, it gave politicians the opportunity to introduce Fractional Reserve Lendingsystem, which involves the unrestrained use of newly printed money to finance all sorts of arbitrary "good causes" defined by politicians and the government. Because the newly printed money is the same as debt, you and I and our children end up with the bill.
What happens is the following: The total amount of money increases. The newly printed money is first used to pay the costs associated with the bureaucracy, then the banks get the money, and use it to finance investments – their own and the customers'. In the end, it "drips" a little on you and me. The establishment receives the money first – that is, when it has the highest value. The middle class and the poor get the money in the end, when purchasing power is diluted – that is, when the money has the lowest value.
This is the main reason why differences are created. The price of money, ie the interest rate, is artificially low in a manipulated interest rate market. "Cheap money" finances stock market bubbles, and real estate prices are skyrocketing. Money finds its way to companies that in a normal and unmanipulated fixed income market would not receive this money. We are "tricked" into investing in unprofitable businesses and spending money on things we can not afford.

Fluctuating consumption. Investments in unprofitable enterprises lead to lower short-term unemployment. The wage level is rising, and we imagine that it is natural. Higher wage levels lead to increased private consumption – but it is not lasting. When wages stabilize again, private consumption falls back to its previous level. And when consumption falls, all the unprofitable businesses that have received "free money" burst – they are wound up or go bankrupt. Unemployment and the debt burden increase significantly, and serviceability decreases correspondingly. Stock market and housing bubbles burst, as they always do. A large amount of worthless money has been used to provide people with work in companies that do not have the ability to survive. At the same time, we have spent money on purposes we can strictly not afford. Society has wasted capital and labor, and is left with even more unemployed and even greater debt, as well as lower purchasing power for every penny.

Let's take an example: A tunnel is to be built. If it solves a traffic or transport problem that otherwise cannot be solved – if the tunnel is more important to all taxpayers (collectively) than for purposes they would otherwise spend the money on individually, if the money was not taxed away – then the tunnel should be built. A tunnel built to satisfy a general desire for "better infrastructure" locally or within a specific geographical area, to provide jobs – it is a different type of tunnel. Instead of thinking about where tunnels "must be built", the state and private interests think about where tunnels "can be built". It is this way of thinking that underlies all political misprioritisations.
Why is the project not stopped? Because each individual project is not significant enough for the individual citizen to get involved. We do not have the strength to protest when our politicians make their wrong priorities to satisfy particular groups of voters. With politicians as the driving force, we plunder each other until the coffers are empty, and we call it solidarity and democracy. This is where Mise's statement about the "invaluable importance of the gold standard" comes in – because the gold standard represents a built-in mechanism that limits the state and politicians' ability to print and spend money that society does not really have.

The root of the problem. In other words, the root of the wrong priorities is the political redistribution of productive, creative capital through constantly new laws, regulations and regulations. This can only take place in societies where the political elite and the state bureaucracy exercise increasing influence over the people and the economic factors. Statistics from the OECD show that the public sector in Norway has grown from approximately 29 per cent in 1960 to just over 50 per cent today, measured as a share of gross domestic product (GDP). In comparison, the figure for the United States is about 27 percent in 1960 and just under 40 percent today.

Paper money is the same as debt.

A study by John W. Dawson and John J. Seater ("Federal Regulation and Aggregate Economic Growth") concludes with the following (USA): If government regulations had remained at the 1949 level, US GDP would today be 54 trillion US dollars instead of at 16 trillion. The average American would have $ 125 more each year for savings and spending. If we speculate in this study used on Norwegian conditions, the only Norwegian would have had about one million kroner more "to live on" every year for the last 000-30 years. Increased political and bureaucratic power can be the problem. If we had kept the gold standard, this unfortunate development could have been avoided.

Gold and freedom. In the absence of a gold standard, our freedom also disappears. Without the opportunity to redeem our money in gold, our freedom and our property rights – including over body and soul – depend on the favor of politicians. We lose or give up our influence on society's spending of money, and thereby also give up our freedom to control our own lives. Lenin, Hitler and Mussolini well understood the connection between gold and the freedom of the individual, and all three introduced a ban on the ownership of gold in private hands. Lenin stated that the surest way to turn social conditions upside down in society and introduce communism is to replace the gold standard with paper money. It is difficult to look at what is happening in Europe now: massive money pressure, unsustainable debt levels, mass unemployment and demands for even more central government from Brussels, as something other than a confirmation of Lenin's statement.
In today's society, it is accepted that we have no more rights than the state gives us. If we analyze all forms of government interference in our lives, we see that this interference is made possible through the state's revenues – ie debts, taxes and fees. The influence of a state power is thus proportional to the state's revenues. It is impossible to protect the individual's freedom and value creation in society without limiting the state's opportunities to indebt and tax us.
What is the difference between how today's politicians treat us and the fascist Mussolini's statement 75 years ago that "we understood that the more complicated the interaction becomes for civilization, the more we must limit the individual's freedom"?
The statement contrasts with President Eisenhower's statement that if all we want is total security, we might as well put ourselves in jail. There we get a roof over our heads, the food we need and security. In a world without a gold standard as a measure and correction for politicians' and the central government's money pressure and the build-up of uncontrolled debt levels, it may seem strange that both Mussolini and Eisenhower are right: a thoroughly regulated and unfree society ruled by power-hungry politicians and bureaucrats, where fear for the individual's freedom and the politicians' need for protection sets the standard for interpersonal interaction.

Olav is a financial journalist at Ny Tid.

His Eirik Olav
Hans Eirik Olav
Olav has a long time from the financial world behind him.

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