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Assume The Opposite

Demise Of Our Debt Based Financial System?

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(Just in case your not aware, 97% of money in the UK economy is created by private banks as debt. The BoE has published this. Our economy is debt based and requires private debt to expand otherwise we enter a tailspin. Housing and stock markets are where most credit goes, hence a detachment from the real world)

This an article via Zero Hedge:

http://www.zerohedge.com/news/2015-06-17/fed%E2%80%99s-fatal-flaw-gold-and-predictable-endgame

It's well worth a read and drills down into what's been going on in the US economy and the financial system. It should apply the same to the UK.

Here are some snippets:

"You can see from 1971 onward, the point we moved to a pure fiat currency, the nation’s fiscal condition began to deteriorate with a negative inflection in 2000 and an even more severe downturn in 2008, which is the year that really represents the economic event horizon. That was the year the legs simply gave out and there is no coming back from that event. Not under the same system"

Conclusion

"The monetary system enacted in 1913 (and all fiat monetary systems), issuing currency backed by interest bearing indenture, was fatally flawed due to a requirement for its very survival to create an ever-increasing stock of money, without also providing the means for perfect investment, resulting in a system where debt ultimately consumes all profits and labour over time. Only a banker could dream up such a system. And so upon the system’s creation, its death was wholly predictable. The grand experiment proving an instrument of almost complete wealth destruction (via devaluation and debt) for all but the very architects of the system itself. For them, the system has, as was the sole objective, amassed wealth beyond the imagination of men and gods alike"

IMO HPI is probably the one of the quickest ways to increase the money supply but it can't last forever as 2008 showed us.

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http://www.firstrebuttal.com/2015/06/16/the-feds-fatal-flaw-a-predictable-end/

Link to the original article as the link is incorrect.

However a debt based system is dependent on velocity of money. If the velocity of money declines you either need to print more or you end up with default and bankruptcies. I'm guessing the more debt you have velocity needs to increase, if you fail to maintain it you have a financial crisis. However the banks keep inventing new money with financial innovation. This in itself causes issues as I think events in 2008 demonstrated when I would suggest the believe in this new bank money was suddenly eroded and the banks essentially wanted cold hard cash. The problem being there isn't enough cash in the system to meet the requirements and as the new money machine ground to a halt you had a credit crunch and the debt based system ground to a halt.

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Hasn't the velocity hit an all time low? So they must be printing more money?

https://research.stlouisfed.org/fred2/series/M1V

Velocity of M1 Money Stock
2015:Q1: 5.949 Ratio (+ see more)
Quarterly, Seasonally Adjusted, M1V, Updated: 2015-06-11 4:16 PM CDT
This currently puts it at around 1975, just after the financialization explosion which started after the end of Bretton Woods, see graph at link.
Velocity of MZM Money Stock
2015:Q1: 1.350 Ratio (+ see more)
Quarterly, Seasonally Adjusted, MZMV, Updated: 2015-05-29 8:26 AM CDT

This has never been lower.

https://research.stlouisfed.org/fred2/series/M2V/

Velocity of M2 Money Stock
2015:Q1: 1.498 Ratio (+ see more)
Quarterly, Seasonally Adjusted, M2V, Updated: 2015-05-29 8:26 AM CDT

Neither has this.

What happens to these stats if the Fed puts up rates is anyone's guess, I can't see higher rates increasing velocity. I fully expect a major debt crisis if the Fed moves rates upwards. My guess is we won't get above 1% before this is triggered, although admittedly this prediction is based on a wild guess with no real thought given too it... So take with a pinch of salt.

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The thing is, the system has been unsustainable for decades and hasn't collapsed yet.

Sure, it must ultimately fail but that may not be any time soon - those in power will do anything to keep it going. Ultimately, 'real' money will be printed in whatever amounts it takes to make good banking system promises or at least, save the bankers.

There will have to be hyperinflation before any final crash - essentially, hyperinflation represents the people losing confidence in the monetary system as people scramble to get rid of money before it becomes worthless. However, even in the Weimar republic, people kept faith with money for a long time into their hyperinflationary bust. Faith in money is drilled into the population from an early age.

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The thing is, the system has been unsustainable for decades and hasn't collapsed yet.

Sure, it must ultimately fail but that may not be any time soon - those in power will do anything to keep it going. Ultimately, 'real' money will be printed in whatever amounts it takes to make good banking system promises or at least, save the bankers.

There will have to be hyperinflation before any final crash - essentially, hyperinflation represents the people losing confidence in the monetary system as people scramble to get rid of money before it becomes worthless. However, even in the Weimar republic, people kept faith with money for a long time into their hyperinflationary bust. Faith in money is drilled into the population from an early age.

The Weimar hyperinflation was a deliberate (and largely successful) attempt by the German govt of the day to wipe out the war reparations that had been imposed by the Treaty of Versailles. Faith in the mark recovered substantially after the revaluation in 1925, although naturally most German families were poorer than they had been before. The Berlin middle-class, arguably the most sophisticated and cultured in the world at that time, was hit particularly hard. This crisis of confidence, together with a lingering suspicion that these events had been part of an international conspiracy against Germany (the term 'jew confetti' was used to describe hyperinflationary marks), foreshadowed the unimaginable horrors yet to come.

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The Weimar hyperinflation was a deliberate (and largely successful) attempt by the German govt of the day to wipe out the war reparations that had been imposed by the Treaty of Versailles. Faith in the mark recovered substantially after the revaluation in 1925, although naturally most German families were poorer than they had been before. The Berlin middle-class, arguably the most sophisticated and cultured in the world at that time, was hit particularly hard. This crisis of confidence, together with a lingering suspicion that these events had been part of an international conspiracy against Germany (the term 'jew confetti' was used to describe hyperinflationary marks), foreshadowed the unimaginable horrors yet to come.

Depends on how you want to define successful, if you add in that it helped cause the rise of Hitler and led to around 40m people in Europe dying, ultimately leading to Germany becoming the dominate industrial power in Europe it was destined to before the stupidity of the 1st WW, then yes it was indeed a very clever long term strategy.

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There will have to be hyperinflation before any final crash - essentially, hyperinflation represents the people losing confidence in the monetary system as people scramble to get rid of money before it becomes worthless.

As far as I'm concerned, there has already been a hyperinflation - in asset values. Except this time, before money becomes very scarce/valuable.

This:

Nail on the head, that's why a number of smart people I know have bought property, they don't care that they rental income is small, they just want to save their wealth from the coming wipe out of cash, bonds and equities...

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"they just want to save their wealth from the coming wipe out of cash, bonds and equities... "

I've got very litte bank savings now, everything converted into house/extensions, ~80% is equity, 20% mortgaged. I don't bother chasing savings rates, just want instant access on everything.

I've converted all my pensions into cash funds, can't find anything else with low risk. As soon as I can, I'll use the 25% tax-free lump sum to clear the mortgage and then will have even less interest in what the bankers are doing.

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