Debt & Reserve Currency

Debt-Crisis

QUESTION: Marty, Would nations still issue debt in the reserve currency or their local currency? If countries issued debt in the reserve currency, wouldn’t that be the same problem you have pointed out with the euro?

You have made it clear that debt is the great destroyer of civilization. It seems that this is the one factor that wipes out the monetary system every time. Do you think it is possible to eliminate government debt?

Thank you so much

SD

PEI30Y-Y 3-14-2015

ANSWER: Historically, all nations default and that is what wipes out civilization. Only a fool assumes that debt is some how a natural part of the system. They clearly do not know their history. The US debt was entirely paid off before the Civil War. Such people never heard of the sin of usury or the Arab culture of prohibiting interest. Is it possible to eliminate government debt? Of course it is. Government debt has not always existed.

1861DemandNotes

In fact, not only was there no national debt, the US government did not issue paper money after the Revolution until the Civil War. So there is plenty of precedent to demonstrate that government can function without debt at the federal level. Keep in mind, that states still borrowed. There was a massive sovereign state default in the 1840s.

Bank-US-Signed by Biddle

Andrew Jackson’s war against the Bank of the United States eliminated a central bank and set in motion total chaos.  Jackson unleashed the age of Wildcat Banking where private banks issued their own paper money that nobody knew even where these banks were located.. The currency issued by Oxford County Bank of Fryeburg, Maine, was actually issued by speculators who then sold their currency wholesale at deep discounts in New York City. A fraud market emerged because there were countless banks all issuing money (receipts) based upon pretend deposits without a central bank regulating anything.

BrokenBankNote-1

This is the classic example of Wildcat Banks that were created thanks to Andrew Jackson’s personal vendetta against the Bank of the United States. Oxford County Bank was chartered in 1836, but never actually entered the banking business. There was no bank taking deposits or lending money. They onlyissued currency against deposits that never existed. These notes are very common confirming that this type of fraud was successful and quite common. There were numerous Wildcat Banks and there was no way for people to confirm any bank’s notes were worth anything following the antics of Andrew Jackson.

Louisiana 1842Jackson unleashed a massive financial crisis. As state banks then failed, some states like Louisiana issued bonds to bail out the banks. However, the fictional money was far too vast and many states went into default on their bonds by 1842 – even permanently. So we have the same reaction of government trying to bail out banks and in turn they themselves go bust. Those who support Jackson because they hate banks, also fail to notice history.

 

Consequently, it will require the crisis to accomplish such reform. We will not simply change monetary systems for the hell of it. So we have a lot to do and the analysis cannot be made up of hot air and opinion. You have to have the proof. So can governments exist without debt – absolutely.

There is a tremendous difference between issuing debt in a reserve currency and a domestic issue. You are correct. If there is a reserve currency and governments issued their debt in the reserve, you would end up with total chaos just as you have in the Euro. That would also tend to suggest the requirement of a central control, and that is not likely for nations will not surrender their sovereignty in such a manner.

A reserve currency simply replaces the dollar. That is the political goal of China and Russia. It also makes sense for it separates the problem of the reserve currency being impacted by domestic policy objectives which become exported. The Fed lowered rates sharply to bail out US banks and other nations issue dollar debt because of the low interest rates. Japan had strict currency controls whereas you could not issue debt in yen without the permission of Japan.

The debt crisis is separate and distinct from the reserve problem. Obama’s former chief economic adviser has already floated the idea that the USA should let the reserve status of the dollar go. This is not a voluntary position. Congress has no ability to prevent other nations from using dollars without imposing the same capital controls as Japan imposed. That prevents the from emerging as a reserve currency, but if the US did that then we absolutely have to have some electronic reserve currency. There would be not choice.

Hill-4

The US debt is linked to the reserve currency insofar as there is a deep dollar bond market unlike other currencies. The US debt can be used as reserves and is to the extent of about 40%. This is what will eventually force the evolution to a reserve currency replacement. When I am in meetings around the world, this much seems to be understood as inevitable. So the nut-jobs can tout some impractical new currency to strip government of power as if that will ever get a vote and the bankers will fight hard to keep the government borrowing so they can make a commission. Between these two extremes lies reality.