A Grim Fairytale

Once upon a time, there was Sovereignty that ruled the World. They owned all the Gold, had all the “good people” and most of the people were happy. (As you know you can make some of the people happy all the time, you can make all the people happy some of the time, but you can’t make all the people happy all the time). The Sovereignty had an abundance of natural resources (lots of Gold), had a high level of Unity, and was ruled by a benevolent King and Queen. Even the Knights were hard working, and were loved by the people.

All economic transactions were settled with the Gold Coins. The King minted the Coins and made a large profit by putting some of the Gold in his pocket. Over the years the Sovereignty prospered, built castles in the sky, created a culture that was second to none, and continuously created innovations in Transportation, Technology, Communication, and the Arts. Yes there were some issues with other Sovereignties but the “good peoples” Militia prevailed.

In the beginning of the new Debt Creation policy, the King used the money to build “peoples” assets such as Bridges, Dams, and Water and Sewer systems. This was good because it put people back to work, put money in their pockets, and created new business units. The people returned to normalcy and there was peace in the Kingdom.

Over the years, the King was creating debt as fast as he could, so that he could give the “money” to the people. The Hell with infrastructure! After all, the only way the King could keep his job was to give away money. By doing this the King kept the masses from revolting. Some mal-contents were unhappy because goods and services cost more every month and they were paying more and more in taxes. Soon other Sovereignties were buying the Kingdoms debt. After all, the Kingdom was the best, and who wouldn’t want the highest quality I.O.U on earth. This also helped keep the rate of inflation and interest rates down.

Eventually, the masses were tapped out. They did not have enough money to buy everything they wanted, and to make matters worse, the interest on the Kingdom Debt was sky-rocketing, and taxes to pay for the debt was very high. Again, the King started to worry about a possible be-heading. The King sought council. He found out that Keynes had passed away, but there was a new Wise Man named Greenspan. The King called in Greenspan.

Greenspan said, “We need to create credit cards for the masses so they can buy whatever they want, and create a special kind of debt for buying assets. We will issue a Credit Card to everyone in the kingdom, even newborns. They can charge their desires on the card and pay a small monthly payment. Let the issuer of the Card collect a high rate of interest. The common man won’t know it, but it will take him about 22 to 24 years to pay off one charge. Also, the Kingdom will loan money to the masses so they can buy their homes (even newborns). The loan will require no money down, and low rates of interest for 3 to 5 years. After 5 years, the interest will go up. By doing this, the people can get into a home with no money down and pay very little. By the time the interest rate on the home loan increases, the value of the home will be substantially higher and the Kingdom can loan them more money. Also let me run the Super Bank.” The King liked the fact that even newborns could buy things so he told Greenspan, “Make it happen!” And so he did.

The people loved the new credit facilities and again the Kingdom prospered. Debt expanded in the Kingdom exponentially. Everyone owned a house (even newborns), bought everything they ever wanted, and decided that saving money was for smucks. Meanwhile, the King was getting upset because the money he was receiving from the peoples Mortgage payments was not enough to fund his lifestyle. It is not good public policy to have the King not able to spend more money than the people. Again he called in Greenspan. The King told Greenspan, “I need more money. Taxes and cash flow from the Mortgages is not enough.” Greenspan said, “Sell the mortgages to the private sector and let them package the mortgages into bonds and sell them to the people. This method will liquefy your Mortgage holdings, and will also lower short term Interest Rates. This will tend to keep interest and inflation rates low. As long as the stupid Foreigners keep buying our debt, we will be fine.

The “good people” understood how the system worked and were very much involved in same. There was a high degree of contentment among the people, and they were willing to do almost anything to preserve their way of life.

Then one day, the Kings Gold Mine was depleted. Some people started to hoard Gold, and their Free Market collapsed. Most people spent their Gold holdings on survival. There was nasty and prolonged depression in the Kingdom. The people suffered, the investors suffered, and the King was in a quandary as to what to do. He hired a “wise man” name Keynes to advise him. Keynes said “…the problem is that the people don’t have any more Gold. You have it all! You must print money so that the people, the Kingdom, and investors will survive.” The King queried, “How do we print money?” Keynes said, “The Kingdom must go into debt, and create a Super Bank that can buy the Kingdoms obligations. The Super Bank will print money with your picture on it. The Kingdom then borrows money (just printed) from the Super Bank. The Super Bank then holds the Kingdoms debt as an asset, and owes the Kingdom. Continue this process until everybody is happy. The Kingdom now has money to allocate through the Kingdom for the public good. In affect the Kingdom owes the people, and the people are the Kingdom. Don’t you see? The Kingdom Debt is owed to the people, and the people are the Kingdom, so it’s a wash, and the people will never understand how we did this little trick. We will then “tax” the people to pay for the debt. Of course, you the King will receive the tax. You can put some of the money in your pocket and the rest can service the debt. You must also ban the ownership of Gold, and make it illegal to use Gold as a settlement of debts. Only the new paper can be used for transactions.”

The King had no idea what the wise man said but liked the fact that is picture would be on money, he could keep his Gold, and he could put some money in his pocket. He told the wise man to proceed (like many leaders, he was willing to try anything to get the people off his back). There was no documentation or public vote on the creation of the Super Bank, but as you might get guess, the plan worked. Along the way Keynes conned the King into allowing the Super Bank to set short term interest rates.

Over time, home prices rose exponentially, the Mortgage market boomed and the people were big time happy. Soon, the Kingdom did not produce anything except compliancy. The Kingdom’s people moved their business to other Sovereignties that provided cheaper labor and materials. The Kingdoms principal business was spending on consumable goods provided by other Kingdoms. Their natural resources, Sprit de Corp, and respect for the King were depleted. The Kingdom continued to print money on a parabolic scale, but inflation was contained due to cheaper imported consumable goods. The Kingdoms money flooded the World Market. The Kingdoms excessive money printing policy soon started creating “bubbles”.

Then one day, housing prices stopped going up. Sadly at the same time, the low interest no down payment Mortgages were reset to higher interest rates. The people who have benefited from this give away program were now faced with losing their home. The Kingdoms economy was faced with a major meltdown. Some of the Kingdoms large businesses went broke on wild speculation schemes. The King was worried. Again, Greenspan came to the rescue. He told the King, “let the Super Bank bail them out”. The King was not sure what his advisor said, but decided (afraid of a riot) to grant Greenspan his wish. The Superbank (paid for by the people’s taxes) bailed the “bubbles” out. More money was printed.

The bottom line for the Kingdom was it transferred its wealth to foreign nations. In return it received cheap goods, cheap energy, and a higher standard of living. Now other Kingdoms were beginning to use the transferred wealth to improve their standards of living. They are competing with the Kingdom for basic commodities the Kingdom assumed would always be available. Not understanding why the Kingdom was collapsing, the King, the people and Greenspan continued to print money, stay complacent, and buy stuff.

The end of this tragic Fairy Tale is obvious: The Kingdom lived beyond their means far too long… The Piper has been paid with paper (printed money)…the Piper has been screwed. Now the Piper seeks his revenge with higher rates of inflation, and interest rates.

The moral of the story is: don’t print money exponentially, if you don’t understand the consequences.