Podcast: Paul Brodsky: CB’s are Nearing the ‘Inflate or Die’ Stage. : Chris Martenson,Peak Prosperity

By | December 13, 2013

An old interview with Chris Martenson, that is even more pertinent today with our explosion in debt..

Curtesy of Peak Prosperity

On The Imbalance Between Debts and Money Supply

We are seeing — not only in the US but in Europe and in Asia, as well – separating bank assets and base money. Base money is comprised of currency in circulation plus bank reserves that are held at central banks — at the Fed or that is at the ECB, the Bank of Japan, so on and so forth. This is how the global economy rolls, as they say.

Bank assets are loans mostly. And the amounts globally are staggering: something approaching $100 trillion in global bank assets. And in the US we think that is somewhere around $20 trillion held in the US and abroad. And the numbers for the monetary base are much, much lower. Specifically in bank reserves — that is the amount of reserves that are collateralizing, if you will, all of those $100 trillion in bank assets — something about $8.5 to $9 trillion dollars. So that gives you a sense of perspective as to how much the global banking system is leverage. We are in a baseless monetary system.

The marketplace forces deleveraging, and there are two ways to deleverage. One is to let credit deteriorate on its own in the marketplace. And the other is to manufacture new currency or bank reserves. Those are the only two ways to deleverage a balance sheet.

What policy makers do not want to see is bank asset deterioration. That would lead to all sorts of bad things. You would see banks fail. You would see bank systems fail. You would see debtors fail and it would just feed on itself in an accelerating fashion. And so monetary policy makers have no choice but to deleverage in the other way, which is to colloquially print money; to manufacture electronic credits and call them bank reserves.

And to the degree that that extends into the private sector where debtors begin to fail en masse, that would increase failures of the bank assets in turn. And it would end the mortgage bond securities market, for example, and the leveraged loan markets, and end the private sector shadow banking system. So it does not work for anybody to have credit deteriorate. The only way to deleverage an economy is as we are saying: to create new base money with which to do it.

On The Wisdom of Owning Gold & Hard Assets

The point here is you can either monetize debt or you can monetize (sell) assets. Or you revalue an asset on the balance sheet already of the Treasury or the Fed. And obviously that asset, we think, is gold. And that is the monetary asset that they have always reverted in the past. And that is the one we think that currencies, currently baseless currencies will be devalued against.

And so that we think is the mechanism that is ultimately going to play out whether in the marketplace or through some policy administered devaluation. Currencies are going to be devalued and that is where we sit right now. Timing this is impossible. We think the amount it would have to be devalued by, getting back to your original question, has got to be the amount of or something close to the amount of the gap (tens of US$ trillions) between bank assets and bank reserves. So it is a significant number.

And Treasury ministries, being the ultimate issuers of obligors on the hook for currency repayment, we see them as lending the gold to their central banks so that this mechanism, this asset monetization devaluation can take place. And so we think it is the only way out ultimately. And we will see that happen either in the marketplace or through proclamation at some point. And it is really what has to happen.

And so there is no physical limitation on the amount of currency that central banks may manufacture. And so this is a completely viable way to deleverage the system — by purely destroying the currency that we have. It is debt currency, so we are going to destroy the debt in real terms behind them but not destroy them in nominal terms. That is the net effect of all this.

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