the plan for the future

The road to serfdom

2 May 2020 (latest revision: 30 September 2021)

The price of safety

In the past, when borrowers could not repay their debts with interest, they became the serfs of money lenders. That's why usury was often forbidden. Usury was the road to serfdom. Most people have forgotten about that. Nowadays, most money is a debt. Money is loaned into existence and must be returned with interest. If the interest rate is 5%, and € 100 is circulating, then € 105 must come back. So, where does the extra € 5 come from?

There are a few options:
  • Lenders (on aggregate) spend some of their balance so borrowers (on aggregate) can pay the interest from existing money.
  • Some borrowers default and do not return (part of) the balance.
  • Borrowers (on aggregate) borrow the extra € 5.
  • The government borrows the extra € 5.
  • The central bank creates € 5 out of thin air to cope with the shortfall.

  • 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 great 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.

    For every borrower, there is a lender. At some point, the borrowers cannot borrow more as they are already deeply in debt. And the people who are getting desperate are capitalists. They have so much capital, and if we do not borrow to spend on products and services, it stops being profitable. And so they are willing to lend at lower rates. That is until interest rates are nearing zero.

    There is always a risk to lending money. Central bank currency does not carry that risk. It becomes an attractive investment once interest rates are near zero. If investors prefer this currency to bonds and stocks, then investments come to a halt. That can cause an economic crisis. A solution might be to set interest rates on central bank currency below zero. That is not so easy because of the existence of cash.

    To prevent an economic crisis, central banks step in and buy these bonds and stocks instead. In this way, central banks may end up buying everything. And then the government owns everything, which looks like communism. Some people believe this to be a secret plan of a globalist elite conspiring to enslave us all. More likely, it is an unintended outcome of economies being cornered by usury, which is interest on money and debts.

    If a central bank buys government bonds, it is printing money to pay for government expenses. It can produce inflation, but the government is not taking over the economy. It can, however, undermine trust in the currency. The undermining is a process that may take many years, but the unravelling might not be. Suddenly people may lose their confidence in money altogether so that interest rates skyrocket and the economy craters.

    When central banks buy up corporate debt or support the stock market by buying equity, they embark upon an even more dubious path. It is the collectivisation of the private sector. But why does this appear to be necessary? The need emerges when interest rates are near zero, and central banks cannot lower them further. At that point, the markets for money and capital stop functioning.

    At interest rates near zero, investors prefer the safety of currency and government bonds to more risky investments like corporate debt and stocks. This protection may not be 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 print unprecedented amounts of money while interest rates do not rise due to higher inflation expectations.

    It also appears that the ultimate protection is not gold but currency, at least in the short and medium-term. The reasons are:
  • Debtors must pay back their debts 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 needs gold to pay off debts. That is why central banks can hardly print enough. And that is why a deflationary collapse is the most imminent threat to the economy. The reason probably is the price of protection provided by currency and government bonds.

    It is impossible to establish the market price of this protection as long as interest rates cannot go lower. Only a holding fee on central bank currency can reveal this market price. 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 borrow at the lowest rates and probably get paid for borrowing unless people lose trust in these debts or the currency. The need to print money to finance government expenses might not be there if interest rates are negative. And that could promote trust in currencies. People may not like negative interest rates, but financial markets are in disarray because the price of safety is too low, which means that interest rates on currency and government bonds are too high.

    Until recently, a shortage of capital and savings caused interest rates to be above zero, but not so anymore. Now there is a capital and savings surplus. Ancient wisdom has come back to haunt us, and biblically, it appears, as the world financial system is in dire straits. In the end, it is all about usury, again. Usury is the road to serfdom. It always has been.