Fiat Credit = Debt Delusion

"If all our present taxes be mortgaged, must we not invent new ones? and may not this matter be carried to a length that is ruinous and destructive?" ― D. Hume  Political Discourses, Of Public Credit 1752

"No amount of REAL DEBT is unreasonable and no amount of FIAT DEBT is reasonable." RW. Love

David Hume, believing public deficits to be dangerously addictive, advocated balanced budgets for the economy [with surpluses as needed to sustain a suitable “reserve” for public emergencies such as war]. He feared that allowing public debt to accumulate would lead to a state in which all tax revenues were committed to P&I payments. And when this happened, he suspected the state would be forced to “invent new taxes” [such as inflation which is a global tax on all holders of the common currency] to support even more public debt and more taxes … initiating a public debt spiral .. until financial ruin and destruction occurred [ie. a public and private credit collapse].

Because he considered fiat currency to be death by counterfeiting, Hume failed to imagine how fiat credit [an Orwellian doublespeak embodied in all fiat bank notes] could be used to “finance” a debt spiral and [temporarily if not indefinitely] defer the accompanying credit collapse. But that omission changes nothing in reality except the manner and duration of the debt delusion.

The delusion and Gresham’s Law

“For me, it is far better to grasp the Universe as it really is than to persist in delusion, however satisfying and reassuring.” ― Carl Sagan

The US public and private debt escalation, based on fiat credit since 1971, cannot be stopped ... it is, as Hume predicted, a Ponzi spiral that will only end when credit finally collapses.

• REAL DEBT arises from REAL SAVINGS ... which is the REAL SURPLUS of REAL PRODUCTION in excess of REAL CONSUMPTION.
• REAL DEBT allows for [but does not require] MONEY ... it is REAL and reality has limits.

• As long as the US$ was redeemable [via Bretton Woods] into something REAL, there was a "limit" on DEBT and ALL DEBT was REAL and reasonable.

• FIAT DEBT arises from FIAT CREDIT … which is nothing more than central bank notes/liabilities detached from all reality.
• FIAT DEBT requires FIAT MONEY precisely because it is not REAL. FIAT DEBT then becomes FIAT MONEY ... and, because neither is real, both are unlimited.

• After the 1971 revocation of Bretton Woods, there was NO LIMIT ON ANY DEBT [public or private] other than the practical implications of any Ponzi scheme … ALL DEBT became FIAT and unreasonable.

The ramifications of FIAT CREDIT [as opposed to REAL SAVINGS] are so extreme that nobody [including Hume and YOU] ever imagined how they would be tested. But today we see them unfolding in extremis everywhere as FIAT CREDIT spirals upwards in a Ponzi scheme that dwarfs any other in history … engulfing ALL DEBT [both public and private] as it does.

Now, some of you will object and insist that “Not ALL DEBT is FIAT.” Really? Consider this:

• people are paying off credit cards and mortgages with federal stimulus funds
• renters are paying rent with federal stimulus funds
• employers are making payroll with federal stimulus funds
• states are paying benefits with federal stimulus funds
• ... ad infinitum
• until there is no private debt or real savings left
• only public debt and fiat credit.

Private debt [aka real savings] is being transformed into public debt [aka fiat credit] in a variation on Gresham’s Law which, again, is so extreme that nobody ever imagined it before.

Davies dominoes

For those who have trouble grasping the debt delusion cast by fiat credit, consider Tony Davies’ “The Fall of the Dominoes” which uses dominoes to explain the inexorability of what is happening to us.

First Davies carefully “lines up" the earlier dominoes by showing us that our various "policies" [which we like to think we can manipulate separately] are in reality "organically" connected to one another. Then Davies confirms Humes’ fear when he concludes:

"Politicians eventually borrowed so much that the Fed’s monetary policy became a servant to politicians’ fiscal policy. All of this ends with significant and sustained inflation. The sequence of falling dominoes is too far along to stop."

Just as Hume predicted, public debt becomes a spiraling addiction  … supported by more and more taxes … which [enabled by fiat credit] eventually take the hidden, confiscatory form of inflation [a de facto tax levied globally on all holders of the common currency] … until ALL DEBT is swept up … like a hurricane … in the maelstrom of FIAT CREDIT … and REAL SAVINGS disappears as credit collapses.

And while I would disagree slightly with Davies in that I believe the Fed is the master, not the servant, of the politicians in an "inverted totalitarianism" ... this is a distinction without a difference. So here is another domino description focusing on debt, credit and inflation.

1. Once PUBLIC DEBT is allowed [as Hume feared], it is only a matter of time until more taxes and more public debt begin to spiral upwards. [There may be calls along the way for “no new taxes” and “balanced budgets” … but they will be overridden by the opportunistic or contradicted by the hypocritical.]
2. When higher taxes are no longer politically viable, FIAT CREDIT [first as a last resort,  then in a great moderation and finally as a public mandate] will be conjured up to “finance” the ever increasing public debt … without realizing this is the point of no return.
3. Then “the delusion” sets in … and it takes many forms … “it’s only temporary” … “we owe it to ourselves” … “we only need to pay interest not repay principal” … MMT.
4. But “the reality” [as noted by Hume] is that public debt can only continue to increase with more taxes … and so inflation is embraced as an arcane but pragmatic [albeit regressive] tax policy ... tearing families [and society] apart as it progresses … making bigger deficits for corporate bailouts and the welfare state even more urgent.
5. Along the way those who can will attempt to evade the common currency inflation tax using any means possible … including absurd asset bubbles or speculative cryptocurrencies backed by nothing at all.
6. As FIAT CREDIT swells, it engulfs ALL DEBT [as noted above].
7. The spiral accelerates until something breaks … economically and/or environmentally.
8. In the end ALL CREDIT [including REAL SAVINGS] collapses.

It seems clear that domino 6 is down, 7 is falling … and 8 cannot stand much longer. So you see, public debt … once coupled with fiat credit … creates the fatal delusion of unlimited resources .... and this is precisely what puts it on a collision course with reality which IS, as we know, limited. Buckle up!

Oh, what a tangled web we weave,

When first we practise to deceive!

― Sir Walter Scott, Marmion