Insolvency Crisis Looming?
Sunday, August 12th, 2007Garrett Johnson does a great job of condensing what’s been going on in the US economy and global debt markets in this fine article: The Insolvency Crisis: How we got here, and what to expect

Did you know that pennies are worth so little now that their base metals are worth more melted down than as currency?

This has been very common in history when a government tries to “create wealth” through uncontrolled fiat money printing. The difference this times, as opposed to historical comparisons, is that in history the governments outlaw ownership of precious metals. Our government has so devalued the currency that they are outlawing the melting down of base metals. (our government outlawed private ownership of gold from 1933 to 1974)
In 1923, the Weimar Republic in Germany printed their currency into extinction. Here’s how:
When the government needs more money than its people are able or willing to lend it, it monetizes the debt. That is what happens in this country when the government runs a big deficit. The Federal Reserve (our central bank) “buys” as many bonds as necessary to stabilize the market. It prints money on the security of these bonds. Despite the facade of the government supposedly “borrowing,” the net result is the creation of printing press money. (Actually these days the money is created in the form of new bank deposits–checkbook money–but the net result is exactly the same as if bills were printed.)
This is what happened in Germany. The government issued notes which were promptly discounted by the Reichsbank, i.e., the bank issued money on the “security” of these worthless notes. To compound the evil, the bank failed to raise its interest rate sufficiently. Businessmen found it very profitable to borrow money from the bank and buy up goods, shares and companies. Their debt was wiped out within weeks by the rapid inflation, and the businessman remained holding the valuable assets he had bought. The net result was a huge “private inflation” caused by the rapid expansion of credit. Even foreign exchange was bought with borrowed money, so that the Reichsbank actually financed speculation against its own currency. Yet the bank refused to raise interest rates, arguing that this would only add to the cost of business and thus would increase inflation!
Children playing with stacks of worthless currency, Germany 1923
Woman burning stacks of worthless currency in her stove for heat, Germany 1923


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