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The exponential increase of paper dollars

14 - The Exponential Increase of Unbacked Paper Money

As the requirement to peg their currencies to gold was lifted, countries began creating un-backed paper money substitutes at an unprecedented rate. Rather than pay for their purchases in gold, governments issued paper debt instruments such as treasuries and gilts as payment.

Our Definition of Money Supply Now Changes

Our perception of money supply needs to change at this point. Since the precious metal backing has been removed, we can no longer think of the money supply as the weight of gold and silver in existence. Money supply is now simply the amount of paper money substitutes in circulation. And since there is no limit to the production of paper money, since the early 1970’s the supply of money substitutes has increased at an exponential rate.

US Money SupplyUK M4 Money Supply

To put this statement into perspective, consider that it took the entire history of the dollar up to 1974 to create the first $1 trillion of money supply (M3), and only one single year (March 2008 – April 2009) to create the latest trillion! The UK took all previous history of the pound up to the end of 2002 to create the first £1 trillion of money supply (termed M4 in the UK) and only 6.5 years to 2009 to double it. These growth rates are truly staggering and acutely frightening.

Recent Government Bailouts are Increasing the Money Supply Even faster

Recent government stimulus packages would not have been possible under the previous gold standard agreements. So much gold would have left these countries that credit would have evaporated, throwing them into a deep depression. Yet the current governments of these countries believe that the cure for our economic woes is to further increase our debt and to print even more paper money to bail out the financial system. In effect they are trying to “buy another boom”.

Everyone loves an early inflation. The effects at the beginning of an inflation are all good. There is steepened money expansion, rising government spending, increased government budget deficits, booming stock markets, and spectacular general prosperity, all in the midst of temporarily stable prices. Everyone benefits, and no one pays. That is the early part of the cycle. In the later inflation, on the other hand, the effects are all bad. The government may steadily increase the money inflation in order to stave off the later effects, but the later effects patiently wait. In the terminal inflation, there is faltering prosperity, tightness of money, falling stock markets, rising taxes, still larger government deficits, and still roaring money expansion, now accompanied by soaring prices and ineffectiveness of all traditional remedies. Everyone pays and no one benefits. That is the full cycle of every inflation.8

Future Prosperity will be Hollow

Please note that, from this point onwards, any prosperity the government attempts to generate will be hollow, while the wealth destruction of those with cash, savings, treasuries and so on will accelerate. Hugo Stinnes, a successful industrialist during the time of Germanys inflation, declared in much-noted speech that it was madness to think that a defeated Germany with all its huge burdens could spend more, have more, work less, carry an ascending prosperity, and do it all with mirrors. But Germany seemed quite willing to try. Sound familiar?

Writing in February 1921, in the midst of the German hyperinflation, Dr Walther Rathenau who was appointed Minister of Reconstruction wrote "The majority of statesmen and financiers think in terms of paper. They sit in their offices and look at papers which are lying in front of them, and on those papers are written figures which again represent papers … They write down noughts, and nine noughts mean a milliard. A milliard comes easily and trippingly to the tongue, but no one can imagine a milliard. What is a milliard? Does a wood contain a milliard leaves? Are there a milliard blades of grass in a meadow?"9

Nowadays we are talking about trillions of Dollars and Pounds being created but it is hard to imagine how much money that is.

> A trillion is a one with 12 zeroes behind it: 1,000,000,000,000.
> It is a million millions or a thousand billions.
> A stack of $1 bills which is 100 meters tall is a million dollars.
> If your stack was 68 miles high you would have a billion dollars.
> A trillion dollars is a stack 68 thousand miles high! That's one quarter of the way to the moon.

To look at it another way, light travels at 186,000 miles per second. It is the fastest thing we know about in the universe. It takes 8.5 minutes for light to travel the 93 million miles from the sun to the earth. So how long would it take light to travel one trillion miles? The answer is 2 months. Two full months travelling at 186,000 miles per second takes you a trillion miles! Now that puts government money printing into perspective!


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