In the January newsletter from Elliott Management, Paul Singer wrote in part.
“If investors lose confidence in paper money, as evidenced by either a hard sell-off in one of the major currencies or a sharp fall in bond prices, the Fed and other major central bankers will be in a pickle. If they stop QE and/or raise short-term rates to deal with the loss of confidence, it could throw global markets into a tailspin and the worldwide economy into a severe new recession. However, if they try to deal with the loss of confidence by stepping up QE or keeping interest rates at zero, there could be an explosion in commodity and other asset prices and a sharp acceleration in inflation.”
“Loss of confidence.” “Loss of confidence.” “Loss of confidence.”
A “loss of confidence” seems to be an important subject, but what’s it mean?
Primarily, in modern economics, a “loss of confidence” means a loss of the willingness to borrow.
It may also mean an unwillingness to lend.
But mostly, the loss of confidence in the economy means a loss of confidence in one’s ability to repay debts.
Thus, a “loss of confidence” means a loss of the willingness to borrow currency and go into debt. Given that we use a debt-based monetary system in a fractional reserve banking system, a refusal or unwillingness to go into debt is arguably anti-social and, if sufficiently widespread, poses a threat to the entire financial system.
I.e., if I borrow $250,000 for a home, I actually create a new $250,000 in credit with my signature and promise to repay the alleged debt. By borrowing I create capital needed to fund our economy.
If I borrow $250,000, the banks can then use my $250,000 promise-to-repay/note as collateral (an “asset”). Under fractional reserve banking, the bank can use my note to justify lending up to ten times the note’s face value. My $250,000 note can justify the bank’s lending up to $2.5 million to other consumers/debtors.
Thus, my mere signature on a $250,000 note might be sufficient to create a total of $2.75 million in new credit to stimulate the economy. However, if I lose confidence in the economy and don’t believe that I’ll be able to repay that $250,000 loan, I will refuse to borrow the $250,000, and the economy might suffer a $2.75 million dollar loss of potential “stimulation”.
You can see how important a public “loss of confidence” can be. If enough people lose confidence and therefore refuse to borrow (and thereby go deeper into debt), the debt-based financial system could collapse. If enough new funds aren’t created by going further into debt, the pre-existing debts might not be paid and the Ponzi scheme might collapse.
In the event of a serious loss of public confidence, we could expect the government and/or the Federal Reserve to use their powers to create a comparable sum of fiat currency to inject into the economy. The purpose would presumably be to compensate for and supplant the loss of “stimulation” caused by people who lost confidence in the economy, and therefore refused to borrow more currency.
Under such circumstances, the Federal Reserve and/or national government might describe their creation of fiat currency as “Quantitative Easing”—which is exactly what we’ve in the aftermath of the onset of the Great Recession in A.D. 2007-2008. The public lost confidence in the economy and stopped borrowing. The government/Federal Reserve tried to replace that lost borrowing by injecting QE into the economy and lowering interest rates to make borrowing irresistible.
But even with lots of additional cash to be loaned and low interest rates, the majority of the public still could not be persuaded to borrow, go deeper into debt, and thereby stimulate the economy. QE and low interest rates have done enough to slow further economic decline, but they haven’t yet caused enough “stimulation” to precipitate a recovery.
Point: A “Loss of confidence” means a public refusal to borrow and go deeper into debt. A debt-based monetary system can’t survive a widespread refusal to borrow.