Sunday, October 29, 2023

Constructive and Destructive Roles of Credit - By Alasdair Macleod

 This article defines credit, a subject upon which there is a lack of public knowledge. What people call money is in fact credit, and money itself, which is physical gold without counterparty risk, rarely if ever circulates. Nearly everyone, including most economists, don’t understand credit and the importance of its value being tied to money.

Nor do they understand that bank credit is just a minor part of the colossal system of credit.

A common mistake is to think that bank notes are money, because unlike a bank deposit they are possessed in hand. But they are a credit liability of the issuers, which today are central banks. Their value depends entirely on the public and foreign creditors’ faith in terms of their purchasing power, like any other form of credit.

The expansion of credit is fundamental to economic progress, but that expansion can only be determined between creditor and debtor. This does lead to disruptive fluctuations in bank credit, but they are self-correcting. Far worse is government abuse of credit and their attempts to manage economic outcomes.................

......It has never been so important to understand credit, and the fact that since 1971 it has been totally divorced from global money, which legally and naturally is physical gold. It is an egregious error to think that the dollar has replaced gold — maybe the dollar is the highest form of credit, but it is not money.

The ending of the dollar-based credit system is now in sight, an inevitability which has been entirely predictable.  From an equivalent value of $20.67 to the ounce, legally confirmed in 1900 but existing de facto from the 1850s, the dollar has already lost nearly 99% of its value. Most of this has been from 1971, shown in the last of our charts:

Additionally, there is evidence that China and Russia have prepared themselves for a G7 credit crisis outlined in this article by accumulating substantial quantities of bullion, which they can use to back their currencies. The moment this option is triggered, the entire dollar based credit system will be threatened with collapse, if only because everyone will wake up to the fact that has been legally true since Rome’s first laws in the Twelve Tables and confirmed by John Pierpont Morgan in testimony to Congress in 1912: that gold is money, everything else is credit.

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