Sandor asked an important question:

If the government issues greenbacks to pay off T-Bond holders, don’t the bond holders have freshly printed currency in their hands? I don’t see the currency as ‘extinguished’, only the debt. In this case, all the public debt is effectively monetized and a lot more currency enters the system. With greenbacks, the only restraint on government spending is the demand for the currency. It is easy to envision a scenario in which the government effectively creates greenbacks hyperinflation due to runaway spending. This doesn’t happen in the collateral constrained environment which we have today. What am I missing?

The way debt-money systems work is there are two kinds of money: circulating currency and credit. Both function identically as media of exchange but … currency is not term-limited. Credit carries time-associated costs that increase along with the credit surplus. One cost is vanishing currency: our crisis can to some degree be considered dollar (currency) preference (due to the overwhelming costs associated with increased credit). Currency is removed from circulation: it is hoarded or extinguished.

– What Bond-holders gain is replacement for currency that has been extinguished elsewhere.

– Government meets its own obligations with circulating currency which extinguishes both debt and currency. This is a minor — but marginally important — claim on currency. Because repayment of government debt with taxpayer funds annihilates circulating money, the idea is for government to issue currency to meet redemption demands rather than removing currency from circulation.

– The plutocracy is made up of debtor tycoons whose ‘wealth’ is the debts they take on. The public believes tycoons to be creditors, this is not so. They are debtors who borrow fortunes then compete with the public for circulating currency to exchange for these debts: they aim to turn debts into wealth.

The outcome of both dynamics is a shortage of circulating currency: this includes high prices for goods during periods of currency-driven deflation. High prices are the means by which tycoons force their customers to repay the tycoons’ vast debts.

To meet a shortage of currency the government borrows from finance. The government fills a hole by digging a deeper one.

When you lend to the government — by depositing $100k in Treasury Direct — you are lending circulating currency to the government. Circulating currency is all that the ordinary citizen has access to, he/she cannot simply ‘write a loan’ to the Treasury.

Wall Street simply writes its loans into existence, not creating currency but rather offering ‘fiat loans’. Wall Street expects to be repaid in circulating currency (from taxpayers: this is the purpose of taxation, BTW, to launder finance debts).

Wall Street lends the funds that become currency, then lends more funds to the government that must be repaid with currency. (Good deal for Wall Street!)

Currency must be given ‘value’ otherwise the Street would have no use for it or credit. It is public use of every kind of money which gives it worth: the need for citizens to labor or steal in order to gain it. That a worker will die to gain a dollar gives each dollar worth. The intention of finance and tycoons is for them to gain all the circulating currency for themselves while the debts (obligations) become the ‘property’ of the rest of us.

Too much of a good thing: there is excess of debt: wiping out the smallest part of it would eliminate currency altogether.

Individuals “don’t see the currency as extinguished” because it has been previously extinguished elsewhere. The extinguishing is the ‘why’ of our crisis: not enough ‘money’ (too much debt). Adding more ‘money’ adds to the debts, trying to manage debts = currency shortage. Here is how these transactions ‘work’:

– You lend the government $100k in circulating money (you earned/saved it)

– The govt. takes in $100k in circulating money (which flows toward Wall Street or is extinguished retiring another loan).

– You are repaid $100k in credit plus interest (onto your account @ Treasury Direct). You must either buy goods and services by way of your linked account @ Treasury Direct or buy circulating currency from your bank (which is repaid with credit from your Treasury Direct account).

– Wall Street lends to government $100k in fiat loans (entered into a computer database by a cretin with a nose-ring and Metallica tattoos).

– The govt. takes in $100k in credit (onto the firm’s account at the Treasury).

– The govt repays Wall Street $100k in circulating currency plus interest plus ‘convenience fees’.

– Ordinarily the government borrows more from Wall Street to repay Wall Street (those convenience fees add up). Eventually (now) the debt burden effects the credibility of the entire finance system. Borrowing to repay is counterproductive, the numbers take on a life of their own. Debt is ‘dead money’: new loans are taken on to retire and service existing loans and nothing else.

What to do?

– Default: loans are not repaid on schedule or in the form agreed to when the loan is issued. Ordinarily, defaulted loans are repaid over time, after ‘conditions have improved’ (and currency is depreciated making loans cheaper to repay in real terms). The US cannot default because the government can issue currency as necessary without the need to borrow.

– Jubilee By Keen offers central bank/finance loans to replace non-performing loans. Additional funds are borrowed to pay a ‘behave yourself’ bonus to bank depositors. Collateral for all lending is the same deposits. Any variation on the Jubilee By Keen shifts system liabilities to the depositors by way of central banks, with all obligations to the taxpayers/citizens who are guarantors of the central banks.

– Ordinary jubilee is repudiation by another name.

– An economy can continually take on more debt to retire maturing issues. Finance debts are too large to repay out of ordinary earnings (GDP), attempts to do so bankrupts the economy (Restating this: issuance of loans in the first place bankrupts the economy but not at once).

– Loans are retired over time when lender and borrower both migrate to the same balance sheet and the loan is effectively extinguished.

– Because the increase in borrowing is an increase in money supply, there is depreciation of ‘money’. This effective inflation has repayment/service in funds whose unit worth is less than those originally lent. Repayment cost in real terms is effected by the interest rate (aimed to compensate for loss of funds’ worth over time).

– Loans are repudiated: this is non-payment at any time including the distant future. Debts are not paid because they cannot be paid or because debtors refuse to make payments (class war).

Because Debt = Wealth: elimination of one = elimination of the other. The outcome is accelerating, self-amplifying debt-deflation with cascading failures of economic agents that cannot survive without earnings (which have been borrowed from others, which in turn have been borrowed from others, still).

Without a (solvent) lender of last resort there is little/nothing to keep the process from running to its conclusion which is loss of system credit/creditworthiness (Fisher). All loans become bad loans: currency worth expands to render loans impossible to retire, there is no credit to be had, nor currency. ‘Credit wealth’ evaporates.

The consequences of repudiation/non-payment are the reason why system managers do everything in their power to prevent it. What they try to do is expand credit/offer more loans.

Because government repayment with taxpayer funds annihilates circulating money, the idea is for government to issue currency to meet redemption demands rather than removing currency from circulation.

– The loans extended to the government are ‘fiat’ debts (ledger entries). The lender demands repayment in circulating currency (taxpayer funds).

– The loans would be repaid with pure fiat currency issued without liability by the Treasury for the explicit purpose of repaying particular debts owed by the government. The ‘fiat debt’ would be repaid by ‘fiat currency’ which would annihilate both. The lender would not like it (but the government can make an offer the lender cannot refuse).

– The loan is gone along with the accompanying obligation to remove currency from circulation (by the amount of the loan).

Make no mistake about it: this is a hostile act against Wall Street: the government repudiates its debts by forced exchange of fiat tokens in place of circulating currency. This is fair play because the loans are themselves are fiat loans. The problem today — as pointed out by Ms. Nicole so many times — is too many (fiat) claims against a too-small amount of real wealth. Currency (wealth) is created only the instant required to extinguish a small percentage of claims against it.

Governments can overdo currency issue and have done so in the past. However, debts are a claim on currency rather than an adjunct to it. Even if the government issued $10 trillion in currency at once: there are $55 trillion in outstanding debts (excluding non-funded obligations that are debt-analogues). At the end of the day there would be $45 trillion in debt and no currency. The only uncertainties would emerge around the added trillion$ flow throughout the economy.

Currency is a futures contracts on petroleum. Credit represents the unsupportable burdens of past consumption/waste. What currency represents is the future where petroleum has value rather than worth.

There are additional steps that can be … and should be taken: reforming margin- reserve lending, a borrowing moratorium (stop digging), the ‘hard currency Jubilee (thanks to Keen) and more.