As seen in the previous article, the total value of negative-interest rate bonds has jumped from nothing to $13 trillion in just two years.
Although governments issuing negative interest rates bonds don’t have to pay interest on those bonds, they still have to repay most of the principal.
What a bummer. Wouldn’t it be great if someone invented a government bond that not only didn’t have to pay interest (as with negative interest rate bonds) but also didn’t even have to repay the principal?
Well, folks, they appear to have done just that. They’re called “perpetual bonds”. They’re hot off the press, and the concept seems straight out of Looney Tunes.
Last month, Gold-Eagle.com published an article entitled “Gold and the Perpetual Bonds Era”. The subject was “perpetual bonds”–a concept I’d heard of for the first time only about a week earlier.
Judging from what I’d already heard and the Gold-Eagle article, it’s apparent that “perpetual bonds” are—like “consumerism,” debt-based currency, sub-prime loans, fractional reserve banking, deficit financing, negative interest rates, market manipulation, and “helicopter money”—just another manifestation of the madness that’s inherent in the concept of fiat, debt-based currency—and of government’s desperation to do something, try anything, that might work to avoid or postpone a coming economic collapse.
What will trigger that collapse? It will be the moment when the world realizes that we must either pay the existing debt or repudiate the existing debt by declaring bankruptcy. The U.S. National Debt (at least $20 trillion and possibly as much as $200 trillion) is too great to ever be repaid. Government should admit the truth and declare bankruptcy. But, if government repudiated that debt, it would also repudiate the value of all of the correlative debt instrument (like U.S. bonds) that are currently being used as “capital”. I.e., if government declared bankruptcy and repudiated $20 trillion in debt, it would also destroy $20 trillion in paper capital (U.S. bonds) currently used as collateral to provide the bank credit needed for loans to buy cars, homes and build businesses and shopping centers. The loss of $20 trillion in paper, debt-based “capital” would collapse the U.S. and global economies.
So, we’re coming to a time when we must choose to either pay our debts (which we can’t and won’t do) or declare bankruptcy (which will destroy trillions of dollars worth of paper “capital” leaving us with little left to lend or borrow). We be screwed. We are truly caught between the rock (having to pay) and the hard place (repudiating our debts and destroying our paper “capital”).
The fundamental problem with bogus ideas like fiat currency has been described in the past as “false premises lead to false conclusions” and more recently in the world of computer programming as “GIGO” (Garbage In; Garbage Out). The fundamental idea behind those descriptions is simple: Once you embrace, believe in and adopt a false premise, that false premise will logically lead you to an inevitable conclusion that will also not only be false but even embarrassing, painful and potentially lethal.
Ayn Rand expressed the same idea when she wrote, “We can ignore reality, but we cannot ignore the consequences of ignoring reality.” In other words, we’re all free to embrace whatever stupid, irrational, and false ideas we take a fancy to. But we’re not free to avoid the consequences of adopting such false ideas.
Fiat currency is a stupid, irrational and false idea.
However, fiat currency is not inherently false, stupid or irrational simply because it’s made out of paper or electronic digits. In theory, we could use sea shells, buckskins, jugs of moonshine or paper as “money” just as easily as we could use gold. The problem with “paper money” is that it’s debt-based. A debt is merely a promise to pay. How hard is it to promise to pay $1, $1,000, $1 million, $1 billion or even $1 quadrillion? It’s not hard at all. You don’t have to work, produce or save. All you have to do is make a promise to pay (go into debt) and you can be rich.
That’s how governments and central banks can “spin money out of thin air”. All they need to do is make promises to pay. So long as the world accepts those promises as true, the intrinsically-worthless fiat monetary notes will be accepted as money.
The problem is that you’ll never find any man, government or central bank who you can trust to “spin” that paper money “out of thin air” and not abuse that power to enrich himself, his friends or special interests by simply making a few more “promises”. Inevitably, you wind up with more promises (debts) than can possibly be kept (paid) and the system collapses under the weight of all those promises to pay (debts).
The essential stupidity behind fiat currency is the idea that it’s reasonable for us to trust government or central banks to create fiat dollars in a way that serves the best interests of the vast majority of the people. The power to create “money” is a power that no “Solomon” is wise enough, or moral enough, to wield.
• In the 1970’s, Americans went completely off the gold standard and accepted the premise that a pure, fiat (debt-based) currency was good. Once we accepted that false premise, we headed down on a road that could only lead to calamity.
As we come closer to that calamity, the people in charge will attempt one crazy (desperate) idea after another to somehow deny or conceal the inherent madness of fiat currency and avoid its inevitable consequences. We were doomed to calamity the moment we ignored the constitutional mandate that we use only gold and silver as lawful money and allowed government to implement a fiat, non-constitutional currency.
We might postpone that calamity a while longer, but we won’t permanently avoid that calamity. And, once we succumb to that calamity, we won’t escape it until we abandon the primary false premise that “fiat currency is good”.
According to the Gold-Eagle article,
“‘Perp Bond Thunder’ is the new gold price driver in play. Moreover, it has the potential to influence major markets for many years into the future.”
I doubt it. As it stands, the idea of “perpetual bonds” is so bizarre and irrational, that I doubt that that strategy will survive for many months let alone “influence major markets for many years.”
What are “perpetual bonds”? Here’s a clue:
“Japan may lead the world with a sizable launch of perpetual bonds that feature no interest rate and no maturity date.”
Perpetual bonds don’t pay interest or have a maturity date? That means that if I purchase a perpetual bond for, say, $100,000, I will never receive any interest on my capital nor will my capital be returned to me—ever.
Apparently, that’s why they call ‘em “perpetual”–the bonds will remain “perpetually” unpaid.
A true “bond” is a promise to pay.
A “perpetual bond” is a promise to not pay.
I just give $100,000 to the government and, in return, I get a “perpetual bond” that guarantees I will never regain my capital or any interest on my capital.
That’s not a bond. That’s a gift. Or a racket.
Allegedly intelligent people are advocating “perpetual bonds” but I can’t help wondering where will they find investors dumb enough to buy ‘em? Why would any responsible investor or institution lend the government $100,000 in return for a perpetual bond that guarantees that the resulting debt will never be repaid? Why shouldn’t investors just take their $100,000 out in the back yard and burn it?
In fact, the only entities that would be able to “loan” currency to the government in return for perpetual bonds would be the central banks able to “spin currency out of thin air”. If it didn’t cost the Federal Reserve anything to create $1 trillion digital dollars to “lend” to the national government, where’s the harm in accepting a totally worthless and irredeemable “perpetual bond” in return? Where’s the harm in the Fed giving intrinsically-worthless currency to the government in return for perpetually-worthless bonds?
In fact, the harm will be in the form of inflation and the reduction in value of any paper debt-instruments denominated in fiat dollars. The wealth of people who’ve saved in the form of fiat dollars would be destroyed—but who cares? They’re not the government.
• Like negative interest rates, the “perpetual bond” proposal is another manifestation of monetary madness. It’s the fable of the emperor’s invisible clothes made real. The world’s governments and central banks are betting that they can dress up in invisible “clothes” sewn from perpetual bonds and the world will be dumb enough to applaud their sartorial splendor.
For example, here’s some commentary on Ben Bernanke, one of our former economic “emperors”—who is currently strutting his stuff around Japan in the nude:
“Ben Bernanke is probably the biggest money printer in the history of America. He is now working hard to convince Japan to lead the world with a huge launch of perpetual bonds. It’s a scheme to monetize the huge Japanese government deficit.”
By “government deficit” they mean “government debt”. Perpetual bonds are a scheme promoted by government (the naked “emperor”) to reduce or escape its massive, unpayable debt. This would-be escape will supposedly be achieved by monetization (inflating and thereby devaluing the purchasing power of of the fiat currency).
Insofar as emperor Bernanke wants perpetual bonds to monetize the Japanese government’s debt, he’s advocating inflation that will devalue and help destroy the fiat yen.
• Here in the U.S., if our fearless leaders begin to advocate perpetual bonds, it will signal that they intend to cause much more inflation. However, thanks to inflation, the fiat dollar has already lost over 95% of its purchasing power since dollars became a pure fiat currency in the 1970s.
How much more inflation can the fiat dollar stand before it becomes officially worthless? Once the purchasing power of the fiat dollar falls from 5% to 4% to zero, what then? The fiat dollar dies. Then what? Go back to gold and silver (if we have any)?
By advocating perpetual bonds, “emperor” Bernanke indirectly advocates more inflation and, ultimately, the destruction of fiat currencies. That’s interesting when compared to my earlier conjecture that: 1) having embraced fiat currency, we are destined to suffer an economic calamity; and, 2) we won’t overcome and escape that calamity until we reject our original false premise (that fiat currency is good).
How odd, hmm? “Emperor” Bernanke may be using perpetual bonds to destroy fiat currencies.
“Perpetual bonds are known as ‘perps’. If they are used in the manner suggested by Ben Bernanke and other top bank economists, they have the potential to allow Western governments to continue to operate huge fiscal deficits [debts] with the only cost of running those deficits [debts] being the “minor inconvenience” of destroying the purchasing power of most fiat currencies.”
Ohh, that’s rich. Our would-be “emperors” have taken to destroying their own invisible cloaks woven from the insanity of fiat currency and, perhaps, perpetual bonds.
What else, besides the purchasing power of fiat dollars, might be destroyed by perpetual bonds?
Well, if the fiat dollar is devalued by another 90% of its current value, the purchasing power of all government bonds (not just perpetual bonds) will be reduced by 90%. For example, if you invested $100,000 in a real bond and perpetual bonds were used to inflate/devalue the fiat dollar by 90%, then, when you cashed in your “real” $100,000 bond you would suffer the “minor inconvenience” of receiving only $10,000 worth of purchasing power.
Or, suppose you had your retirement savings tied up in a pension fund largely composed of U.S. bonds. If enough perpetual bonds were issued, the value of the “real” bonds in your pension funds would be reduced by however much inflation the perpetual bonds could cause. If perpetual bonds caused 10% inflation, the value of your real U.S. bonds would be reduced by 10% from, say, $100,000 to $90,000. If the “perps” caused 50% inflation, the value of your pension fund bonds would fall by 50% to say, $50,000. If the “perps” cause 90% inflation, you would suffer the “minor inconvenience” of seeing the value of your pension fund fall from $100,000 to $10,000. You’d also suffer the “minor inconvenience” of spending your retirement years in or near abject poverty.
“Perpetual bond issuance allows central banks to keep rates low, which keeps governments happy.”
Understatement of the year.
Of course government will be happy. Perpetual bonds will allow them to not only borrow indefinitely and never have to repay the principle or even interest on the loans—but also wipe out much of the existing debt. It’s like having your rich uncle John die and leave you a billion dollars. It’s like winning the Powerball lottery every year and not ever having to pay taxes on your prize. Yippee!
Any debt-addicted government (like that of the U.S.) would be joyful and ecstatic if it could implement perpetual bonds. It could just spend and spend and grow and grow and never even cause the National Debt to rise.
If perpetual bonds could be established, government could become our god.
“The use of these [perpetual] bonds also dramatically reduces system risk, because governments do not hit a spending limit wall–the only cost will be steadily rising inflation resulting in a steadily rising price of gold.”
Are these world-class economists out of their freakin’ minds? Do they really believe that they can devise a strategy (like perpetual bonds) whereby governments will never “hit a spending limit wall”?
A government without limits is not even possible. The idea is absurd.
But, assuming it was possible to create a government that had no spending limits, would that be wise? Wouldn’t a government capable of unlimited spending quickly morph into a tyranny of unlimited powers?
Besides, if government had access to an endless and infinite supply of currency, what would the value of individual units of the currency be? It would necessarily fall to zero. The forces of inflation would morph into hyperinflation and the entire U.S. economy would resemble that of the Wiemar Republic circa A.D. 1922 or, more recently, Zimbabwe, which peaked around A.D. 2009.
In a sense, both the Wiemar Republic and Zimbabwe had no “spending limit walls”. Zimbabwe printed quadrillions of Zimbabwean dollars. How’d it work out? The result of hyperinflation was the destruction of their national currencies and the collapse of their national economies. I don’t see how “perpetual bonds” are, fundamentally, any different from hyperinflation. Like Zimbabwe, government would get to print an unlimited supply of currency. Like Zimbabwe, the resulting hyperinflation would kill the dollar and collapse the economy.
Nevertheless, perpetual bonds are being advocated by seemingly intelligent, highly-educated men like Ben Bernanke.
• Are the people running the U.S. and global economies really crazy?
No. They might be wicked. They might be incredibly egotistical or arrogant. They might simply be desperate to escape the cage they’ve built for themselves (and for you and me).
But, in the end, they’re trapped (and we’re trapped) in the inevitable consequences that logically follow our fearless leaders’ adoption of a false premise—that fiat currency can safely serve as “money”–that a debt-based currency built on mere promises to pay can replace an asset-based money (gold or silver) built on actual productivity and payments.
Our government and Federal Reserve have defied reality and the consequences of that defiance are now coming home to roost. We’re not going to “beat the rap”. Sooner or later, we’ll have to pay the calamitous price for ignoring reality’s need to make actual payments rather than make mere promises to pay (debt-instruments).
Once in that calamity, we won’t escape until we reject fiat, debt-based currency and return to the gold and silver based monetary system mandated by Article 1 Section 10 Clause 1 of the Constitution which declares in part that,
“No State shall . . . make any Thing but gold and silver Coin a Tender in Payment of Debts.”