Wednesday, Apr 01, 2009
It is often said that we live with a "fiat currency" or with "paper money." This is not entirely accurate. A very small portion of our total supply of money and credit is in the form of physical currency. It depends on how you count it, but regardless, it is under 10% of the total. This is what differentiates our monetary system with that of Zimbabwe or Weimar Germany circa 1920's. Their economies were based on nearly 100% physical currency because nobody would accept the promises of government in order to issue credit.
The vast majority of our money supply is in the form of electronic credit. Electronic credit can be destroyed, while physical notes issued by a central bank cannot. This is why deflation is possible in a credit based monetary system, but not in a paper based monetary system.
In summary, there are many multiples more debt than capital in the world economy. Debt is being liquidated and will continue to do so until it reaches a sustainable level relative to capital. The process of this debt liquidation puts a higher value on dollars relative to debt, thus ensuring an oversupply of dollars is impossible.
Hyperinflation is impossible: Part 1, Matt Stiles, March 16, 2009, http://www.stockhouse.com/Community-News/2009/March/23/Hyperinflation-is-impossible--Part-1.
Assuming this is true -- wouldn't this imply that those people that made bad bets are getting money they shouldn't have otherwise received -- money that didn't even exist? I understand the concern that the bad bets can bring down the economy, but if we continue in a debt-based economy, isn't it natural that this will just occur again? Also, if we are simply covering the bad bets, won't that new money still enter circulation?