That the fiat (paper) money monetary system is doomed is not something new. The death sentence was made official on August 15, 1971, when US President Richard Nixon closed forever the dollar convertibility window into gold at a fixed rate of $35 per troy ounce. Thus died what remained of the gold standard to pass, de factoto a “dollar standard”.
Without euphemisms, that means a “debt pattern” that condemns the economy to an endless boom-bust cycle, and savers to permanent loss of the purchasing power of their income.
Well, in this context, one more symptom of the irremediable condemnation of current money to devaluation occurred a few days ago in the United Kingdom.
I’ll tell you: instead of a new rise in interest rates, which was previously expected by the markets, the Bank of England (BoE) announced last week an emergency intervention to stop the open crisis in the British public debt, suspending the program of sale of bonds and proceeding (again) to the purchase of these with long maturity.
The institution intervened with these purchases in the “gilt” market (bond market) to stop the collapse of its currency, committing itself from the outset to buy some 65 billion pounds. In total, it postponed its sale program of its 838 billion pounds in bonds that was due to start this week. By the way, they are called “gilts” because the original debt certificates issued by the British government had gold borders.
The decision, explained that central bank, was made before the “real risk to UK financial stability” if the market turmoil continued. The BoE also warned of the prospect of “tightening of financing conditions and a reduction in the flow of credit to the real economy”.
This decision came after a number of pension funds had to deal with urgent requests for additional liquidity from investment managers in recent days as British debt prices plummeted.
The collapse of bonds… and the British pound
Although the British Treasury blamed the significant volatility in its bonds on global markets and not on the tax cuts announced by the new government of Elizabeth Truss, the reality is quite the opposite: his economic plan to “save” the UK was repudiated by the financial markets.
The BoE’s response was then a simple lifeline for the pound in the midst of a storm caused by the Truss government.
But why is the pound evidence that the fiat monetary system is doomed?
The most relevant thing about the intervention of the BoE is that it said that the purchases of bonds would be made “at any scale that is necessary”, that is, in an unlimited way, to stop the historic debacle of the pound sterling which hit a low of more than 37 years against the dollar.
If you were wondering what is causing the bullish “rally” that the financial markets have experienced in recent days, you can attribute it to the weakness shown by the Bank of England. Not for nothing since the day of his decision on September 28, gold – real money – has climbed more than 5 percent, but it is only the beginning of a new and vigorous bull cycle.
And it is that, deep down, it is clear that if a central bank has to choose between fighting inflation and “defending like a dog” the value of its government bonds, it will opt for the latter, even if that paradoxically implies printing more money than ever. to buy them and thus monetize their government debt. It is therefore an “aspirin” for what is a terminal illness.
Just as the collapse of British bonds brought the BoE to its knees, similarly, in due course the “massacre” that US Treasuries have suffered will bring the Federal Reserve to its knees. At that nadir in the midst of a brutal recession – which could come sometime next year – we will see its chairman Jerome Powell announce interest rate cuts and new QE cycles through bond buybacks to restart that endless cycle of boom and bust, from which only those who have gold, bitcoin and real assets will come out well. RIP to fiat money.
Editor’s note: This text belongs to our Opinion section and reflects only the author’s vision, not necessarily the High Level point of view.
William Beard Master in Economics from the Austrian School; liberal, gold market specialist and editor of the investment newsletter Top Money Report