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The road to serfdom


2 May 2020 (latest update: 22 May 2020)


 
options for banking insolvency
 

When borrowers couldn't pay their debts with interest they became the serfs of money lenders. That's why usury was forbidden in Christianity and still is in Islam. And Jews were not allowed to charge interest on fellow Jews. Most people have forgotten about that. Nowadays most money is debt. It is loaned into existence and must be repaid with interest. But if there is € 100 in existence and € 105 must be returned then where does the extra € 5 come from?

There are a few options:
  • The lenders (on aggregate) spend some of their balance so the borrowers (on aggregate) can pay the interest from existing money.
  • Some borrowers default and (part of) the balance is not returned.
  • The borrowers (on aggregate) borrow more to pay for the interest.
  • Money units are created out of thin air to pay for the interest.

  • All these things happen and often at the same time. In theory the first two options suffice but in reality they do not. Lenders on aggregate let their capital grow at interest. A few defaults are acceptable but too many defaults can cascade into a financial crisis and cause an economic crisis. The cost of letting the financial system fail is so big that this is not an option. If no-one else is borrowing the government has to step in. In this way debts continue to grow.

    But for every borrower there is a lender. At some point the borrowers can't borrow more as they are already deeply in debt. And the people that are getting desperate are the owners of capital. They have so much capital and if borrowers do not borrow more to spend then their capital isn't profitable. And so they are willing to lend at ever lower rates. That is until interest rates are nearing zero.

    There is always a risk to lending out money. Central bank currency doesn't have that risk so central bank currency becomes more attractive once interest rates are near zero. Investors will then prefer currency to bonds and stocks. Investments may come to a halt and that can cause an economic crisis.

    To keep the economy from collapsing central banks step in and buy these bonds and stocks instead. In the end central banks may end up buying everything. If that happens the government owns everything. This is what communism looks like. Some people believe this is a secret plan of a globalist elite to enslave us all. More likely it is the unintended outcome of economies being cornered by usury, which is interest on money and debts.

    If a central bank only buys up government bonds this is just printing money to pay for government expenses. It can produce inflation but the government is not taking over the economy. Nevertheless, this can undermine the trust in currencies, and that can end badly. The undermining itself is a slow process that may take many years but ensuing the unravelling might not be. Suddenly people can lose their trust in money so that interest rates skyrocket and the economy collapses.

    When central banks buy up corporate debt or support the stock market by buying equity then they embark upon an even more dubious path, which is collectivisation of the private sector. But why does this appear to be necessary? An important clue is that the need apparently emerges when interest rates near zero and central banks can't lower them any more. At that point the markets for money and capital stop to function properly.

    At interest rates near zero investors prefer the safety of currency and government bonds to more risky investments like corporate debt and stocks. It appears that safety is not priced correctly in the markets. In other words, the interest rates on currency and government debts may be too high, even though they are close to zero. It may explain why central banks can print currency like there is no tomorrow while interest rates don't rise due to higher inflation expectations.

    Indeed, the ultimate safety is not gold but currency, at least in the short and medium term. The reasons are:
  • For debtors currency is always the ultimate safety as their debts are denominated in currency.
  • To buy things or to pay taxes you need currency.
  • The value of most currencies is more stable than gold in the short and medium term.

  • Distressed debtors have trouble extending their debts. They are scrambling for currency. Hardly anyone is in need of gold but many are in need of currency. That's why central banks can hardly print enough. And that is why a deflationary collapse is the most imminent threat to the economy. But the reason probably is that the safety of currency and government bonds is not correctly priced in the markets.

    The actual market price of safety can't be established as long as interest rates can't go below zero. Only a holding fee on central bank currency can reveal the true market price of safety. The holding fee will subsequently be the new lower bound and liquidity will return in financial markets. All debts will receive a market price revealing their market value and interest rate. Interest rates on many debts will probably go negative.

    Governments can borrow at the lowest rates and probably get paid for borrowing unless they borrow too much and people lose trust in the currency. But the need to print currency to finance government expenses is not there if interest rates are negative. And that could promote trust in currencies. People may not like negative interest rates but financial markets are seriously distorted. Not paying correct the price of safety may be the road to serfdom.

    And that is all because of usury, which is all interest on money and debts. Interest couldn't be avoided until recently because a shortage of capital and savings caused interest rates to be positive. But now there is a capital surplus. So once interest rates are negative, positive interest rates can be forbidden. Ancient wisdom has come back to haunt us, and in a biblical way it appears. Usury is the road to serfdom. Freedom begins with ending usury.