Macro Economic Trends and Risks
Money vs. Credit

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By EddieLuck
June 3, 2008

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Forgive me for harping back on an old theme of mine, but it is becoming increasingly relevant. The current domestic situation is a tug-of-war between the issuance of credit by our experimental finance system and foreign lenders to the US, and the destruction of credit through banking system losses, home foreclosures, bond defaults, credit card delinquencies and all the rest. That is, between inflation and deflation of the credit supply. Virtually no one in authority understands this.

The inflationary side seems to be winning still, but it is well to remember that if the balance shifts to the other side and total credit starts shrinking (here only, not necessarily in the whole world, though that would surely follow), then simple math dictates that the whole credit structure will come crashing down.

For the first time in world history most of the world and particularly the West has very little money to fall back on if the credit gets destroyed. If we ever fall into the credit-destruction whirlpool, getting out will be much harder than ever before. As far as I can figure it, hard assets and govt. bonds are the only assets that will retain any significant value if the balance tips in the wrong direction because there will only be hard assets and money left. Credit-based assets will have been destroyed.

For some years now, the inflation/deflation battle has raged in economic opinion. There now seems to be little likelihood of the continuation of the gradual inflation of the recent past. It is going to be inflation, or credit crash with deflation. One or the other, depending on which side wins. Credit and price inflation is rising now with negative interest rates in many countries, and will continue unless credit inflation falls behind credit destruction. Inflation is probably what we should hope for. Either way, hard assets seem to be the ticket to financial survival, as far as I can figure it out.

The thing is, our system dictates that eventually we will come to the crash. If the banks are able to stuff enough credit down our throats to keep things going, it just guarantees a bigger problem down the road. Debt ratios inevitably rise until they fall. When they fall, it is very much a case of the bigger, the harder.

I don't think there is any chance that the authorities will comprehend what they have done before it's too late. Mr. Paul, for instance, has made it his life's work to educate Congress and the nation about the risks of a credit-based currency, but he has gotten nowhere so far, and if by some miracle we went back to sound money tomorrow, we would have a lot of piper-paying to do before things smoothed out.

Good luck,