The Road To Serfdom...The Price Of Safety

June 26, 2020

In the past when borrowers couldn't pay their debts with interest they became the serfs of money lenders. That's why usury was often forbidden. Usury was the road to serfdom. Most people have forgotten about that. Nowadays most money is debt. Money is loaned into existence and must be repaid with interest. But if the interest rate is 5% and there is € 100 in existence then € 105 must be returned. So where does the extra € 5 come from?

There are a few options:

- Lenders (on aggregate) spend some of their balance so borrowers (on aggregate) can pay the interest from existing money.

- Some borrowers default and (part of) the balance is not returned.

- Borrowers (on aggregate) borrow the extra € 5.

- The government borrows the extra € 5.

- The central bank creates the € 5 out of thin air to cope with the shortfall.

All these things happen and often at the same time. In theory the first two options suffice but in reality they do not. Lenders on aggregate let their capital grow at interest. A few defaults are acceptable but too many defaults can cascade into a financial crisis and cause an economic crisis. The cost of letting the financial system fail is so big that this is not an option. If no-one else is borrowing the government has to step in. In this way debts continue to grow.

For every borrower there is a lender. At some point the borrowers can't borrow more as they are already deeply in debt. And the people who are getting desperate are capitalists. They have so much capital and if we don't borrow to spend on products and services their capital stops being profitable. And so they are willing to lend at lower rates. That is until interest rates are nearing zero.

There is always a risk to lending money. Central bank currency doesn't carry that risk so central bank currency becomes an attractive investment once interest rates near zero. If investors prefer currency to bonds and stocks then investments come to a halt. That can cause an economic crisis. A solution might be to set interest rates on central bank currency below zero but that is difficult because of the existence of cash.

To prevent an economic crisis central banks step in and buy these bonds and stocks instead. In this way central banks may end up buying everything so that the government ends up owning everything. This is what communism looks like. Some people believe this to be a secret plan of a globalist elite conspiring enslave us all. More likely it is the unintended outcome of economies being cornered by usury, which is interest on money and debts.

If a central bank just buys up government bonds then this is printing money to pay for government expenses. It can produce inflation but the government is not taking over the economy. This can undermine the trust in currencies. The undermining is a process that may take many years but ensuing the unravelling might not be. Suddenly people may lose their trust in money altogether so interest rates skyrocket and the economy craters.

When central banks buy up corporate debt or support the stock market by buying equity then they embark upon an even more dubious path, which is collectivisation of the private sector. But why does this appear to be necessary? An important clue is that the need apparently emerges when interest rates near zero and central banks can't lower them any more. At that point the markets for money and capital stop to function properly.

At interest rates near zero investors prefer the safety of currency and government bonds to more risky investments like corporate debt and stocks. It appears that safety is not priced correctly in the markets. In other words, the interest rates on currency and government debts may be too high, even though they are close to zero. It may explain why central banks can print currency like there is no tomorrow while interest rates don't rise due to higher inflation expectations.

It also appears that the ultimate safety is not gold but currency, at least in the short and medium term. The reasons are:

- For debtors currency is always the ultimate safety as their debts are denominated in currency.

- To buy things or to pay taxes you need currency.

- The value of most currencies is more stable than gold in the short and medium term.

Distressed debtors have trouble extending their debts. They are scrambling for currency. Hardly anyone is in need of gold but many are in need of currency. That's why central banks can hardly print enough. And that is why a deflationary collapse is the most imminent threat to the economy. But the reason probably is that the safety of currency and government bonds is not correctly priced in the markets.

The actual market price of safety can't be established as long as interest rates can't go lower. Only a holding fee on central bank currency can reveal the true market price of safety. The holding fee will subsequently be the new lower bound and liquidity will return in financial markets. All debts will receive a market price revealing their market value and interest rate. Interest rates on many debts will probably go negative.

Governments can borrow at the lowest rates and probably get paid for borrowing unless people lose trust in these debts or the currency. The need to print currency to finance government expenses might not be there if interest rates are negative. And that could promote trust in currencies. People may not like negative interest rates but financial markets are seriously distorted because safety is not correctly priced in the market.

And that is all because of usury, which is all interest on money and debts. Until recently there was a shortage of capital and savings causing interest rates to be positive, but not so any more. Now there is a capital and savings surplus. Ancient wisdom has come back to haunt us, and in a biblical way it appears, as the world financial system is in dire straits. Usury is still the road to serfdom. It always has been.


On the website you can find an extensive array of reseach materials about a financial system based on negative interest rates that may replace the current usury financial system in the near future because there may be no alternative.


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