Authored by Peter Reagan via BirchGold.com,
What does the average person do when they run out of money before the end of the month? According to Federal Reserve data, nearly half of U.S. households report spending every penny (or more) than they earn in a typical month. Like families juggling credit cards, governments often rely on borrowing to fill the gap — only on a much larger scale.
Some people, unfortunately, turn to more desperate means to cover their debt repayments if they can no longer borrow enough money to repeat the cycle.
Why people think that governments, which are run by people, act any differently, is one of the great mysteries of our time.
The key difference is that governments can disguise overspending through complex financial mechanisms and jargon – like “quantitative easing.” That’s when the central bank creates dollars to buy government debt with this brand-new cash. It’s easy to see this expands the money supply, which dilutes the purchasing power of every other dollar in existence. And that’s just one piece of jargon – there’s a lot more. “Fiscal stimulus” or “yield curve control.”
The result, however, is the same: The government’s purchasing power grows as the public’s purchasing power quietly declines.
What governments do when they can’t borrow enough money
The cycle usually begins innocently enough. A government is short on tax revenue for something that they want to get done, so they borrow money.
Like any good money drunk, the government doesn’t ever really repay the debt, though. They just try to pay the interest so that they have more money on hand to spend while continuing to borrow more to meet more campaign promises made by politicians.
Then, when they can no longer borrow enough money to pay for programs and handouts that they want to fund, they move into theft.
Of course, it’s never called outright theft. They use terms like “quantitative easing,” which is just a fancy way of saying that they are printing more money. Of course, that has the effect of making the money in your pocket and in your bank account worth less in real time.
Call it quantitative easing, call it inflation, call it what you want. It is theft of your purchasing power that they didn’t even tell you about before doing it.
How central banks are being used to do it
As the Financial Times recently observed, analysts are increasingly calling this a new age of “fiscal dominance” – in which governments with large debts pressure central banks to keep rates low to lower debt service costs.
The thinking behind the low interest rates is that it will encourage borrowing by consumers and businesses to spur spending in the economy, which is how governments tend to think of the economy growing.
The problem with this situation is that the pressure to keep interest rates low is due to a perceived soft economy, and this perception makes global investors nervous about financing the debt of the governments over those soft economies.
Bloomberg has reported that political volatility in France and Japan is now imposing a “politics premium” on government debt – investors are demanding higher rates to compensate for governance risk.
Which is why governments start to debase their currencies so that they can continue to service the debt and borrow more.
And that’s why central banks and major investors like Ray Dalio are both buying gold and other precious metals and also recommending others to do the same. Bloomberg calls it the debasement trade:
“Sell government debt, as well as currencies… Buy gold, silver… In a nutshell that’s the ‘debasement trade’ that’s become the talk of the town.”
This is a major reason government debt and currencies are down – and on the other side of the debasement trade, gold price is up over 50% this year alone – and as of October 17, silver’s price up over 78% year-to-date. A clear reflection, according to any number of analysts, of capital fleeing debt-based financial assets in favor of tangible, physical precious metals.
Debasement isn’t a new idea
Historians trace the practice of currency dilution all the way back to ancient Rome. When there was an income crisis, rulers diluted their gold and silver coins with base metals to stretch their spending power without changing the face value of the coins. Obviously, that lowered the intrinsic value of the coins, which also lowered their purchasing power. This is the literal origin of the term “debasement.”
As IMF economist Barry Eithengreen observes, “Debasing the coinage was a convenient mode of taxation.”
Modern governments achieve the same result through money creation.
Today, Washington’s version of that same process appears in fiscal reports: Total U.S. federal debt is currently flirting with $38 trillion ($37.942 trillion precisely, according to the Department of the Treasury).
Each new round of borrowing, every day’s debt auction, injects more dollars into circulation – subtly diluting the purchasing power of every other dollar in existence.
That’s what modern debasement looks like – the same result, but much harder for the public to detect compared to classic debasement of silver and gold coins…
Regardless, citizens and savers are on the losing end of that process.
The new norm
Over the past decade, major central banks have collectively expanded their balance sheets by more than $25 trillion, according to the IMF.2
That expansion has become a standing feature of fiscal policy – what some economists now call “structural debasement.” That’s “structural” because inevitable debasement is built into the system.
It gets worse every year, and central banks and wise investors are recognizing that debt, loans to governments and currencies alike, cannot be expected to increase in value after inflation.
It’s the same dynamic economists describe when they warn that nominal gains can mask real losses once we factor in inflation. Something retirees living on fixed incomes experience firsthand all too often.
Governments have grown accustomed to spending more than they collect – a permanent, structural imbalance. According to the Congressional Budget Office, the U.S. has run deficits annually since 2001. Fiscal watchdogs note that despite years of debate, neither party has advanced a credible long-term plan to balance the federal budget.
The recent government shutdown illustrates the stalemate. As Reuters explains, one side wants more domestic spending, the other more defense spending – but both agree on spending more rather than spending less.
The trend is clear – now let’s focus on what we can do about it.
Even the darkest cloud has a silver lining
Because the majority of our savings are in dollars, their ultimate purchasing power depends on inflation and monetary policy. The dollar has lost over 90% of its purchasing power since the Federal Reserve’s founding, according to U.S. CPI data.3 This means we cannot predict the future purchasing power of today’s savings.
But remember, when currencies lose purchasing power, assets with intrinsic values increase in price. Right now, precious metals are soaring because everything else is starting to look a lot riskier… I’m calling this trend The Great Repricing.
The ongoing debasement of global currencies seems inevitable. There’s just too much debt, and too much resistance to lower spending. I’m not talking about the U.S. alone – this is a global phenomenon, in France and the UK and Japan most notably.
The only real question is how far will your dollars go in the brave new world ahead? A lot of other people are asking the same question – and I don’t think it’s a coincidence that gold and silver prices have exploded so far this year.
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