A Bear Market for Confidence in Governments, the Life Blood of a Currency Regime Explained

3/29/2011 Portland, Oregon – Pop in your mints…

As events in the Middle East continue to deteriorate into violence and the world powers stand around and scratch their heads as the mess at the Fukushima Daiichi nuclear plant in northern Japan continues to spread, some things are starting to come into focus.

First, whatever confidence that people had in Governments across the globe is beginning to wane.  This is partly because many governments are either asking too much of their citizens and giving to little or asking too little of their citizens and giving too much.  Both situations have their respective breaking points and in many parts of the world that point is rapidly being approached.  The former situation is reaching its breaking point in the Middle East and the latter in Japan, the US, and Western Europe.

At The Mint we see the Governmental institutions as a mere mask for the currency regimes that run them.  Once a country hands over the right to mint its coinage (sometimes known as seigniorage), it has taken the first and irrevocable step towards surrendering sovereignty.  In Europe, governments seem to be falling peacefully (resigning) by the week.  Even Canada got in on the act with a recent "No Confidence" Vote, which is worded as if to make our point for us.

In the face of near weekly governmental capitulation, you would think that the Euro rulers would spend their time and ink drafting plans to fill the leadership void being left by the government's departure, right?  Not quite.

Instead, the time and ink is being spent formulating a plan to make sure that the respective governments do not default on their debt.  In fact, ever since the current "Financial Crisis" began, a majority of the measures taken by the governments and Central Banks have been bent on achieving two goals:

1. Assuring that no government, investment bank (save Lehman Brothers), insurance company, or household defaults on its debt.
2. Encouraging these same governments, investment banks, insurance companies, and households to take on an even greater debt load.

Does this seem insane?  On the surface, of course it does.  And it is!  If an entity is bankrupt, it is bankrupt.  The world generally would be better off liquidating the assets of these insolvent entities and getting them into productive hands.  Nearly everyone in the world, that is, except for the currency regimes.

The currency regime (such as the US Dollar, the Euro, or the Yen) has but one incredibly simplistic goal, to proliferate debt.  A currency regime creates demand for their product (a concept that they call currency) by enticing governments, companies, and households to create debt instruments which can only be settled in the regime's currency.

This is the only logical explanation for the response of Governments and Central Banks alike to the financial crisis.  THE CURRENCY REGIME'S VERY EXISTENCE IS DEPENDENT UPON THE EXISTENCE OF DEBT PAYABLE IN THE REGIME'S CURRENCY.  Decreasing debt = Decreasing demand for currency with which to pay it.  This is why there is an active effort to make it more difficult to declare bankruptcy.  It is in the interest of the regime to have a debt "restructured" rather than extinguished.  To lighten the slave's burden, rather than set them free.

Without the need to settle debts in the currency, the currency holders would no longer be subject to the most compelling argument to actively seek to earn the currency in question, to pay a debt.  Without this obvious utility to the holder, he or she would begin to look for reasons to hold the currency in question.  At this point, they would be hard pressed to find one.

Now that we understand the basic interest of the currency regime, it follows logically that the regime will only create ENOUGH CURRENCY TO PAY DEBTS AT A PACE WHICH IS SLOWER THAN THE PROLIFERATION OF THE AGGREGATE AMOUNT OF DEBT INSTRUMENTS OUTSTANDING.  This is what the FED failed to do and precisely why it finds itself resorting to extreme measures such as QE to keep the charade going.

Why would they do that?  In layman's terms, it is to keep the carrot out in front of the horse so that the horse keeps running forward.  In order to continue participating in the system, one needs the illusion of being able to one day extinguish the debt with which they are saddled.

QE Proves that Currency Regime is Irreparably Broken

Guess what?  It is not working.  If it was, there would be no need for QE.  The very existence of QE is evidence that the currency regime is irreparably broken, just like the Fukushima Daiichi nuclear plant.

On paper, the Central Bankers are able to measure in exact terms the right amount of currency to satisfy the outstanding debt at a rate that keeps everyone in "the game" and the horses running at a sustainable pace.

In the real world, the horses run after the carrot and often die before catching up to it.  Before the Central Bank can find another horse to saddle, the wolves come and eat the carrot up.  The bankers string up yet another carrot in an effort to continue the game.

The growing imbalances in the currency and debt markets are about to showcase what happens when the horses and wolves no longer want to play this sordid game.

Trust us, you won't want to be on the field.

Stay Fresh!

David Mint

Email:  davidminteconomics@gmail.com

P.S.  If you enjoy or at least tolerate The Mint please share us with your friends, family, and associates!

Key Indicators for Tuesday, March 29th, 2011

Copper Price per Lb: $4.33
Oil Price per Barrel:  $103.41
10 Yr US Treasury Bond:  3.45%
FED Target Rate:  0.13%

Gold Price Per Ounce:  $1,421

MINT Perceived Target Rate*:  4.25%
Unemployment Rate:  8.9%
Inflation Rate (CPI):  0.5%
Dow Jones Industrial Average:  12,198
M1 Monetary Base:  $1,843,700,000,000
M2 Monetary Base:  $8,984,700,000,000

*See FED Perceived Economic Effect Rate Chart at bottom of blog.  This rate is the FED Target rate with a 39 month lag, representing the time it takes for the FED Target rate changes to affect the real economy.  This is a 39 months head start that the FED member banks have on the rest of us on using the new money that is created.