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The Circle of Debt
publication date: Sep 9, 2010
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author/source: Brad Hamill
Many people like to focus their investment acumen on the stock (equities)
market. When it goes up they surmise that the economy must be getting better.
When the market sinks then it gets blamed on one political party or the
other.
It is this writer’s opinion that the stock market has turned into a giant-sized Las Vegas. High-frequency trading (HFT), massaging of operating earnings to report misinformation to the stockholders, and questionable “analysis” by the “street” leaves me to consider no other option. Most long-time readers know my financial mantra by now: “Focus on the bond and currency markets – they tell the real story regarding the economy”. Why do I say this? Our entire economy is based on debt (the promise to perform future labor). When somebody places a “claim” on that debt (future labor) then money comes into existence. Part of the overall money supply is also known as “currency” – the Federal Reserve Notes (FRN’s) that we carry around in our wallets and purses to buy things. Bonds and currency – together they paint a vivid picture. Let’s examine what I’m going to refer to as “the circle of debt”:  The outer rectangles encompass the major entities in our nation that typically seek to sell their “promises of future labor” (debt). What do I mean by this? Suppose I was to stand in the public square waving a sheet of paper over my head. On it, I had the words: “I, Brad, promise to give the bearer of this note one year of my servitude”. The first day in the square everybody walks by and ignores me (even though they do give a ‘little’ extra space to avoid the ‘interesting’ individual before them). The second day somebody offers to buy my debt for $100. I have a decision to make. Is one year of my labor worth $100? Am I getting a good return by selling my labor? The individual offering to buy my debt might decide to walk away – in which case I would have nothing…unless another buyer came along. I decide to sell my debt for the $100. In doing so, I receive $100 to spend as I see fit. The buyer now has claims on my promise of one year of labor – valued at $100. The nation’s overall money supply goes up by $100 at that very moment. The overall money supply in our nation is equal to the total amount of “claims on future labor” that exist at any given point in time. Any labor that gets completed reduces the money supply. Huh??? Look at the above graphic one more time. All of these entities try to sell their debt to buyers. If their debt doesn’t get sold then nobody has “claimed” their debt and the paper is worthless. The moment the debt gets sold then the nation’s money supply increases by the purchase amount. What is ‘Federal Government’ debt backed by? Answer: your future labor, along with everyone else in our nation. What is ‘State Government’ debt backed by? Answer: your future labor, along with everyone else in your state. What is ‘County Government’ debt backed by? Answer: your future labor, along with everyone else in your county. What is ‘Municipal Government’ debt backed by? Answer: your future labor, along with everyone else in your town. What is ‘Personal’ debt backed by? Answer: your future labor. What is ‘Corporate’ debt backed by? Answer: your future labor if you are a purchaser of the goods and/or services the company provides. All of the entities around the outer circle are vying with each other to sell their debt. Investors look primarily at two components when deciding whether or not to buy: 1) Amount of interest that will be paid on the debt, and 2) Likelihood of the debt ever being paid back by the issuer. Investors will always seek to exchange the current debt that they hold for more attractive debt. Sellers of debt will always try to make their debt attractive so that they can sell it in return for another ‘special’ type of debt known as ‘currency’. Currency is the only thing recognized as ‘legal tender’, with which purchases can be made. Again, every time there is a new ‘claim’ on debt made by the purchase of the debt then the nation’s money supply increases by the amount of the purchase. Every time a ‘principal’ payment is made on debt or a debt ‘matures’ then the nation’s money supply will shrink correspondingly. A default on the debt will also cause a decreasing money supply. A shrinking money supply can bring deflation, while an increasing money supply can bring inflation – assuming a relatively stable supply of goods and services. Notice that there is another rectangle in the middle of the debt circle. This is the Federal Reserve (Fed), which is controlled by the international banks. The Fed also issues debt, but it is a ‘special’ kind, known to us as ‘Federal Reserve Notes’ – or cash – or currency. It is my opinion that one should always refer to these as Federal Reserve Notes, or FRN’s, so as to keep it very clear what they represent. FRN’s are simply ‘created into being’, and are exchanged, at the whim of the Fed, for existing claims on future labor – typically in the form of US Treasury securities (bills, notes, and bonds). In other words, FRN’s are backed by claims on the future labor of the nation, but there are only a certain number of them put into circulation. They are the only ‘physical’ form (besides coinage) of ‘legal tender’ in our land. Non-physical forms of money can be used to make purchases, in the form of new ‘credit’ (claims on future labor). Federal Reserve Notes are a unique form of ‘claims on future labor’ in other ways. They have ‘instant maturity’ – meaning you can cash them in at absolutely any point in time. The one caveat is that you will be remunerated with more FRN’s. For example, you could cash in a $20 bill and receive back two $10 bills in return. Another interesting thing about FRN’s is that they pay no interest. This is on purpose, so that people won’t hold onto them. Instead, they might use them to buy other debt that pays a higher rate of return than zero. Any purchase of new debt using FRN’s increases the nation’s money supply. It is hopefully easy to see how this whole process can easily lead to a very large money supply and the introduction of inflation. People like to complain about inflation, but don’t stop to realize that they are the ones creating it through their active participation in a debt-based economy. The danger our nation (and all developed nations in the world) currently faces is a systematic destruction of our money supply intentionally brought on by the international banks. They are accomplishing this through the destruction of credit (claims on future labor). This is why we see governments all over the world seeking to find new buyers of enormous amounts of debt that they want to sell. They are attempting to recreate the money supply that the bankers are destroying. The governments will fail. It is imperative to reduce or eliminate your personal debt, even though there is no such thing as being totally ‘debt-free’ in a debt-based economy. Your comments and questions are welcome… If you are not currently on the Economic Update email list you can email me at: brad@newfamilyeconomics.com to be added. There is no charge and your email address will never be shared.  Christian Economics, Christian Finances, Christian Money, Christian Wealth, Christian Mortgage, Christian Mortgage Advice, Christian Mortgage Counsel, Christian Mortgage Consulting, Christian Investing, Biblical Economics, Biblical Finances, Biblical Money, Biblical Wealth, Biblical Mortgage, Biblical Mortgage Advice, Biblical Mortgage Counsel, Biblical Mortgage Consulting, Biblical Investing, Creating Wealth, Mortgages For Christians |
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