Monday, July 12, 2004

A Primer - Part V

The War Enabler...

When country "A" decides to declare war on country "B", its ability to do so is directly correlated to its ability to pay for its war machine. Troops, tanks, guns, an air force, bombs, a navy, and on and on.

When a country's currency is tied to a real asset such as gold and there isn't enough gold in the treasury, it simply can't pay the expense of waging war and alternative solutions are found.

A country on a fiat currency system has no problem printing the money to pay for the war machine so war it will be. For example, some say the US government has already spent $100 billion on the war in Iraq. Additional costs are estimated to be anywhere from another $50 to $200 billion. Where does all this money come from?

The simplified answer is probably something like: The U.S. Treasury prints paper Treasury Bonds that they "sell" to the Federal Reserve which prints the paper dollars required to pay for the T-Bonds. Now the government has the dollars to pay for efforts in Iraq and the Federal Reserve uses the T-Bonds as an asset against which they can print many more dollars (principal of fractional reserve) to be lent to banks across the country.

See this link for a graphic flow chart of the process:

Perhaps the most dramatic example of what this can lead to is from the Weimer Republic after World War I. It's instructive to realize that in the beginning, the Weimer Republic's currency was the 20 Mark gold piece, a coin about the size of one of our quarters. After World War I, the Weimer Republic was decimated and they fell into the trap of embracing a fiat alternative to honest money, the new currency became the 20 Mark paper note and as could have been predicted, the inflation began.

This was no ordinary inflation though, as the original 20 Mark paper notes eventually inflated to 4,000,000,000,000 Marks. That's 4 trillion Marks to buy what the original 20 Mark gold piece would buy only several years earlier. I have seen pictures of women loading wheelbarrows of paper Marks into the fireplace to burn for heat and cooking because they were worth less than wood. The government was printing them so quickly and in such numbers that, to conserve the ink, they only printed one side of the paper note.

I am reminded of an exchange with a women who lived through those times in the Weimer Republic after World War I in which she was asked, "how could you possibly support someone like Adolph Hitler through his rise to power?" The lady's response to the question put to her was quite simple, "when you have to catch rats to eat for food, any alternative appears more attractive."

I'm not saying this will be the fate of America, but visit this link for a candid assessment of the state of matter today. This article sheds some light on the financial mess our politicians have created:

The $44 Trillion Abyss

Scroll down to 12/13/2003 Interview on the left of the page for the Real Audio and MP3 links to listen.