Placebo Economics

27 Feb

Placebos: Which do your prefer? The Red pills or the green paper? [courtesy Google Images]

PLACEBOS: Which do your prefer? The red pills or the green paper?
[courtesy Google Images]


For most of American history, we had an “asset-based” monetary system.  The basic “asset” that supported our monetary system was physical gold or silver.

In an asset-based monetary system and/or asset-based economy, the principle form of wealth are the “assets” (payments—usually, in physical gold). 

Insofar as that contention is true, it might also follow that:

In today’s debt-based monetary system and/or debt-based economy, the principle form of wealth is “debt” (not payments—but only paper promises to pay).

Why would anyone want more debt?

Because, in a fractional reserve banking system, debt instruments can be used as collateral to justify larger loans.  If government borrows $100 million, the resulting U.S. Bonds (debt-instruments; promises to pay) can be deposited by banks as collateral to justify more loans.

Under fractional reserve banking, banks could lend nine times the face value of the U.S. Bonds/collateral in their vaults.  The $100 million in government bonds (mere promises to pay) can be used as collateral to lend another $900 million to consumers to purchase homes, cars and flat-screen TVs.  All those additional purchases should “stimulate” the economy.

In a debt-based monetary system, debt is desirable for two reasons:

First, $100 million in debt instruments (promises to pay) can, in theory, precipitate another $900 million in economic activity.

Second, while $100 million in gold for collateral in an asset-based economy can only be acquired by means of hard work and diligent savings, $100 million in debt for a debt-based economy can be created by simply signing a piece of paper that makes a promise.

Thus, in a debt-based monetary system, bank collateral can be “spun” out of thin air by merely promising to repay debt. That’s a huge advantage if you’re one of the “spinners”. 

New debt is constantly required to seemingly “repay” previous debt—or at least the interest on previous debt.

Thus, the debt-based monetary system is a Ponzi scheme that can only survive so long as there’s a persistent influx of new debt and debt-instruments to seemingly pay the earlier debts.



•  Phoenix Capital Research recently published an article entitled “Central Bankers Will Not Be Able to Stop What’s Coming”. According to that article,


“Central Bankers are flummoxed.  Having cut interest rates over 600 times since 2009 (and printed over $15 trillion), they’ve yet to generate the expected economic growth.”

What do they mean by “generate the expected economic growth”?

They mean “cause the people to borrow enough “easy money” to not merely spend, but to generate more debt instruments needed to fuel the debt-based monetary system and “stimulate” the debt-based economy.

Negative Interest Rate Policy (NIRP) and Zero Interest Rate Policy (ZIRP) are intended to seduce consumers into:  1) borrowing; 2) creating more debt instruments and finally, 3) spending enough to stimulate the economy.

Likewise, Quantitative Easing (QE) pumped trillions of fiat dollars into the U.S. and global economies for the purpose of increasing the currency supply and thereby inflating the dollar.  When inflation is sufficient, people are induced to borrow more currency since they can repay their debts with “cheaper” (inflated) dollars—and then spend more to stimulate the economy.

Point:  the primary objective in a debt-based monetary system is to induce people, corporations and governments to create more debt by borrowing more currency.  The need to produce more goods and services is of secondary importance.  In a debt-based system, the primary productive effort is devoted to producing more debt.

It’s no accident that our government has run up the National Debt to (at least) $19 trillion and displays no intention of repaying that debt.  In a debt-based economy, debt is deemed to be wealth.  Once we accept the irrational idea that debt is wealth, those entities seeking to become wealthy inevitably seek to run up the most debt.


•  The big failure for ZIRP and QE is that they no longer induce consumers to borrow, create more debt, and then, spend more currency.

The fact that most people won’t go deeper into debt (even when ZIRP allows consumers to borrow at almost no cost) is evidence that the public will not currently borrow enough to stimulate the economy.

The public’s refusal to borrow “free” currency is odd.  The public is rejecting the “free lunch” of near-zero interest rates.  Central bankers must be shocked or even terrified.  How will they control people who refuse to accept a “free lunch”?

If there were adequate borrowing, the Fed’s prime interest rate could rise to 2 or 3%.  The fact that interest rates are being held at near-zero levels (and may soon go negative) is evidence that the Federal Reserve doesn’t believe the public is borrowing enough to save the economy.


•  The public’s refusal to borrow to the degree required to “spend” our way back to prosperity could be based on some or all of the following factors:


1)  According to John Williams (, real unemployment is closer to 23% than the “official” rate of 4.9%.  Unemployed people have no credit, can’t borrow, can’t personally create debt that can be used as collateral, and therefore can’t spend enough to stimulate the economy.

2) The Great Recession of A.D. 2008, hurt many American debtors badly.  Many debtors lost their businesses, homes or cars.  That debt collapse taught many Americans that it’s dangerous to go deeply into debt.  Result?  Even those Americans who are currently employed are less inclined to borrow and spend.

More, if people learn from recessions and/or depressions to reject going deeper into debt, the central controllers in the Fed should be terrified by the prospect of yet another round of recession/depression giving the public another “lesson” in Debt Dangers 101.  If consumers won’t borrow and thereby create enough new debt to sustain the debt-based economy, the debt-based monetary system and debt-based economy could collapse.

3)  Under ZIRP, banks have been reluctant to lend to consumers and have preferred to lend to corporations.  Why?  Because corporations were better credit risks.  ZIRP leaves so little margin for bank profits, banks can’t easily risk lending to consumers who were more likely than corporations to go bankrupt and default on their loans.  Banks can’t reasonably lend currency to borrowers whose probability (5%?) of going bankrupt is greater than the current interest rate (3%).

But the corporations used much of “free currency” loaned by banks to buy back their own corporate stock.

Result?  There was an increased demand for stocks that supported the stock market—but did little to “stimulate” more production of goods and services and also did little to induce consumers to borrow more so they could create more debt and spend more.

Zero Interest Rate Policies (ZIRP) provided an incentive for consumers to borrow “free currency”—but ZIRP also provided a disincentive for banks to lend to consumers.

4) Deflation (a “stronger” dollar) has arrived and is forcing debtors to repay their debts with “more expensive dollars”.  Just as “cheaper,” inflated dollars encourage consumers to borrow and spend, “more expensive” deflated dollars discourage borrowing and cause people to save whatever currency they have rather than spend it.

5) The global economy is in a recession and/or depression.  Foreign demand and foreign inflation have so far failed to rise high enough to stimulate the US and global economies.


Some people are still borrowing, but not enough to stimulate the economy.

Governments, desperate to stimulate borrowing, are considering a Negative Interest Rate Policy (NIRP) to discourage savings and effectively “pay” consumers to borrow, create more debt, and then spend more currency.


•  Phoenix Capital Research:


“. . . After six years of ZIRP and $4 trillion in U.S. QE . . . deflation is back and Western Central Banks will soon be forced to answer the question:  ‘Can we actually stop deflation?’”

“Unfortunately for bankers, the answer is likely no.”


Whether we can or can’t stop deflation may not be the fundamental question.  The question might be whether the Fed can or can’t entice more American consumers into borrowing more currency that can be spent into the economy—and thereby create more debt that can be used as collateral by the banks.

The problem with deflation is that it not only penalizes existing debtors by forcing them to repay their debts with more valuable dollars—it also inhibits future borrowing.  Anything that inhibits borrowing and prevents people from going deeper into debt has to be anathema to a debt-based monetary system.

If Americans won’t go deeper into debt, our debt-based monetary system could collapse and take the debt-based economy with it.


•  Phoenix Capital Research:


“Japan has engaged in nine QE programs since 1990. Since that time, the country’s GDP growth has been anemic at best.”

Was Japan’s fundamental problem that growth has been “anemic”?  Or was the rate of Japanese borrowing “anemic”?

Which came first?   Diminished borrowing or anemic GDP growth?  Which is cause?  Which is effect?

I suspect that Japan’s economic problems are traceable to a primary phenomenon:  for whatever reason, for the past 20-some years, the Japanese people have refused to borrow enough currency to create enough new debt to stimulate their debt-based economy back to prosperity.


•  In the US, the National Debt has doubled since President Obama came into office.

We can curse Congress and White House for growing the National Debt.  However, if increased borrowing and more debt are truly what’s needed to ultimately stimulate our debt-based economy, what difference does it make whether the consumers are:


1) enticed by the Fed’s use of QE and ZIRP to voluntarily borrow more currency to create more new debt to purchase more goods and services; or

2) If the taxpayers are forced by government’s law into borrowing more currency, and creating more debt under the guise of increasing the National Debt?

Either way, more debt is created that can be used as bank collateral, and the debt-based monetary system is sustained.

From this perspective, it’s possible to view the National Debt as just another device to force consumers to go deeper into the new debt that’s needed as bank collateral to stimulate our debt-based economy and preserve our debt-based monetary system.

In a debt-based monetary system, an increasing National Debt may be just another form of Quantitative Easing.  If that suspicion seems extreme, consider this:

Q:  What’s the primary purpose for the Fed’s QE?

A:  To stimulate the economy.

OK—what’s one recognized purpose for the government’s National Debt?  Just like QE, the National Debt is justified as a means to stimulate the economy.  That similarity doesn’t prove that the National Debt is just another form of QE, but it’s evidence that such might be true.

More, who has really borrowed the $19 trillion that comprises the “official” National Debt:  the government?—or future generations the American people?  Obviously, the American people are expected to repay the National Debt.  Government doesn’t earn or produce anything (other than debt) so government can’t repay the National Debt—nor does it want to.

So, in a debt-based monetary system and economy, does it make much difference whether the Federal Reserve entices people with QE and ZIRP to voluntarily go deeper into debt to purchase more homes, cars, and flat-screen TVs—or if the government forces them deeper into involuntary debt by increasing the National Debt?

Do you see the dichotomy?

The Federal Reserve entices us to voluntarily go deeper into debt with QE and ZIRP.

The federal government forces us to involuntarily go deeper into debt by increasing the National Debt whether we like it or not.

Either way, the apparent object is to create more debt.

Are the Federal Reserve and federal government working together to create more debt, create more debt, create more debt?

Seems so.


•  Could it be that, in a debt-based monetary system and economy, the compelled National Debt is simply a substitute for the public’s refusal to voluntarily go deeper into private debt?

Is the National Debt just another form of QE?

If so, is that why the Republican Party (which is famous for claiming to favor limited government, low taxes and low debt) nevertheless goes along with increasing the National Debt rather than being “fiscally responsible”?

Does the Republican Party leadership understand that, for our debt-based economy to survive (let alone prosper), one way or another, the American consumer/taxpayer must go deeper into debt?   If the people won’t voluntarily go deeper into private debt, can the economy still be saved if the public is forced to go deeper into National Debt?


•  During Obama’s administration, the National Debt has doubled. Did Obama double the National Debt as a form of QE?

If so, what happens to the debt-based monetary system and debt-based economy if consumers not only refuse to go deeper into debt, but also refuse or fail to repay existing debt?

I doubt that anyone really knows exactly what will happen if/when the debt hits the fan, but it’s bound to be messy, can’t be good, and is apparently inevitable.

If American people won’t go deeper and deeper into debt, is it necessarily true that the debt-based economy must therefore collapse?

I think the answer must be Yes.

And, here’s a couple more questions for extra credit:

  1. Would it be more honest to refer to the “consumers” in our “consumer-based” economy as “debtors”?
  2. Would it be more honest to refer to our “consumer-based” economy as a “debtor-based” economy?


•  Phoenix Capital Research:


“Indeed, even Japan’s latest MASSIVE QE program (a single monetary program equal to 25% of Japan’s GDP) only boosted Japan’s GDP for two quarters before growth rolled over again. Indeed, Japan is once again back in technical recession.

“The reality is slowly beginning to sink in that Central Banks cannot put off the business cycle. The world’s central banks have spent over $15 trillion and cut interest rates over 600 times and all they’ve generated is one of the weakest recoveries on record.”


Why so weak?

A couple of likely reasons:

First, you can lead a consumer to a bank, but you can’t make him borrow.

If the public won’t borrow and go deeper into debt, the debt-based monetary system may collapse.

Somebody must borrow and go deeper into debt to keep the debt-based monetary system operational.   If the public won’t create more debt, the government will.

But how long can government continue to go deeper into debt before creditors decide government is a bad credit risk?

When creditors inevitably cut off the government’s credit, will the debt-based monetary system implode?

Again, I think the answer is Yes.

Second, QE may have failed because the bankers believe their own b.s..

Apparently, central bankers believe that the “$15 trillion” in fiat currencies that they’ve injected into the U.S. and global economies since the Great Recession will have the same economic effect as $15 trillion in real (gold/silver-based) money.

In fact, the $15 trillion in fiat currencies is the economic equivalent of a “placebo” given by doctors to sick patients.  The “placebo” is medically inert.  It has no intrinsic chemicals able to help or hurt the patient.  The placebo’s effect is purely psychological.  If the doctor gives you a sugar-pill but tells you that it’s a wonder-drug that’s sure to cure whatever ails you, and if you believe the doctor’s claim, you’ll tend to heal—without any real (chemical) medicine whatsoever.

This “placebo effect” probably explains why African witch doctors can help cure patients by merely dancing, chanting and waiving some rattles.  If the witch doctors’ patients merely believe in the cure, the patients can be healed without “real” medicine.

Fiat currencies can be described as “placebo currencies”.  If enough people really believe that intrinsically-worthless, fiat currencies are, or work just like, real money (gold or silver), the economy might be healed.

But if enough Americans know or suspect that the fiat currencies are nothing but sugar-pill “placebos,” there won’t be a placebo effect.  Without widespread public belief (“confidence”) in the placebo-effect of fiat currency, the whole debt-based monetary system and economy could collapse.

Much of the world has already sensed the placebo-like nature of fiat currencies and have therefore lost its former belief/confidence in the fiat currencies power to “heal”.  More of the world is learning that lesson every day.

The problem is not simply that people are learning that fiat dollars are only placebos.  The problem is that people are learning that the “witch doctors” in government and the Federal Reserve who dispense fiat dollars are charlatans who have no real medicine to cure our economic diseases.

Janet Yellen, Ben Bernanke, and Alan “Mumbles” Greenspan have no more real powers to cure the economy than witch doctors dancing ‘round a fire on the African savannah.  They may have a few herbs and spices that provide a little benefit, but for most part, their cures are “mumbo jumbo”.

ZIRP and QE have failed in Japan, the EU and US because the patients no longer believe in the efficacy of economic “placebos” or the wisdom of our “witch doctors” in the Federal Reserve and/or federal government.

Once we stop believing in the witch doctors at the Federal Reserve, how will the Fed ever restore our belief and confidence in their placebos?  Once we know that our witch doctors have nothing real (like gold- or silver-based money) to offer us and can only provide intrinsically worthless placebos (fiat dollars; promises to pay rather than payments), the economy will not be healed by mumbo-jumbo and our economic witch doctors may be run out of town on rails.

If the previous conjecture is roughly correct, the way back to prosperity will not be achieved by means of more placebos.  It will be achieved only by means of hard work and the “real medicine” of physical gold and silver.



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