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    Default The End of Money

    Editor's Note: Dr. Chris Martenson sent us his article The End of Money, in which he explores the thesis that the US money supply, like a jar of bacterium, has since going off the gold standard grown exponentially, with a terminal growth and collapse stage inevitable. iTulip ordinarily does not publish the "Quality Assurance" process to which we subject such contributions, but Dr. Martenson and Eric Janszen concluded that the QA itself is a useful addition to the piece.

    Janszen: Agents of our monetary system get to casually throw off comments in its defense, like the famous line from Dr. Irving Fisher, Ph.D. in economics, on Oct. 17, 1929: "Stock prices have reached what looks like a permanently high plateau. I do not feel there will be soon if ever a 50 or 60 point break from present levels, such as (bears) have predicted. I expect to see the stock market a good deal higher within a few months." Or Professor Lawrence, Princeton University, in September 1929: "[T]he consensus of judgment of millions whose valuations function on that admirable market... is that stocks are not at present over-valued. Where is that group of men with the all-embracing wisdom which will entitle them to veto the judgment of this intelligent multitude?" Or Fed Chairman Alan Greenspan in testimony before the Joint Economic Committee, U.S. Congress, June 1999: "But bubbles generally are perceptible only after the fact. To spot a bubble in advance requires a judgment that hundreds of thousands of informed investors have it all wrong."

    On the other hand, critics of "The System," as Greenspan calls it, can't get away with the kind of unsubstantiated, rhetorical arguments supporters get away with making. They need to be rigorous. Dr. Martenson agreed with me that our exchange on his article, which follows, strengthens his case.

    The End of Money

    by Dr. Chris Martenson - January 10, 2007

    The greatest shortcoming of the human race is our inability to understand the exponential function.

    - Dr. Albert Bartlett
    While it was operating well, our monetary system was a great system, one that fostered incredible technological innovation and advances in standards of living. But every system has its pros and its cons and our monetary system has a doozy of a flaw.

    It is run by humans.

    Oh, wait, that’s a valid complaint but not the one I was looking for.

    Here it is: Our monetary system must continually expand, forever.

    Which means it has a math problem in the same way that a beached whale has a breathing problem. In each case we have a massive organism that was optimized for a very different set of conditions than those in which it currently finds itself.

    Our monetary system was conceived at a time when the earth seemed limitless and so nobody gave it much thought when we designed it such that every single dollar in circulation would be loaned into existence by a bank, with interest. In fact most thought it a terribly modern concept and most probably still do.

    Since some people might begin grumbling about whether the earth is limitless or not, for the moment let’s remove any debates about natural constraints and simply talk about the mathematical evidence that our monetary system is now entering a stage of explosive, exponential growth.

    Consider these data:

    1) Money supply growth has gone parabolic. It took us from 1620 until 1974 to create the first $1 trillion of US money stock. Every road, factory, bridge, school, factory, and house built, every unit of economic transaction that ever took place over those first 350 years required the creation of $1 trillion in money stock. But it only took 10 months to create the most recent $1 trillion and I don’t recall seeing an entire continent’s worth of factories, schools or bridges built during that time.

    2) Household debt has doubled in only 6 years. Think about that for a minute.

    3) Total credit market debt (that’s everything) was about $5 trillion in 1975, has increased by $5 trillion in just 2 years, and now stands at over $51 trillion.

    4) The wealth gap between the super-wealthy and everybody else is widening at a furious pace.

    What’s going on here? Could it be that the US economy is so robust that it requires monetary & credit growth to double every 6-7 years? Are US households expecting a huge surge in wages to be able to pay off all that debt? Are wealthy people really that much more productive than the rest of us? If not, then what’s going on?

    The key to understanding this situation was snuck in a few paragraphs ago; every single dollar in circulation is loaned into existence by a bank, with interest.

    That little statement contains the entire mystery. If all money in circulation is loaned into existence it means that if every loan were paid back, all our money would disappear. As improbable as that may sound to you, it is precisely correct although some of you are going to consider this proof that I could have saved a lot in tuition costs if I had simply drunk all that beer at home.

    But with a little investigation you would readily discover that literally every single dollar in every single bank account can be traced back to a bank loan somewhere. For one person to have money in a bank account requires someone else to owe a similar sized debt to a bank somewhere else.

    But if all money is loaned into existence, with interest, how does the interest get paid? Where does the money for that come from?

    If you guessed “from additional loans” you are a winner! Said another way, for interest to be paid, the money supply must expand. Which means that next year there’s going to be more money in circulation requiring a larger set of loans to pay off a larger set of interest charges and so on, etc., etc., etc. With every passing year the money supply must expand by an amount at least equal to the interest charges due on all the past money that was borrowed (into existence) or else severe stress will show up within our banking system. In other words, our monetary system is a textbook example of a compounding (or exponential) function.

    Yeast in a vat of sugar water, lemming populations, and algal blooms are natural examples of exponential functions. Plotted on graph paper they start out slowly, begin to rise more quickly and then, suddenly, the line on the paper goes almost straight up threatening to shoot off the paper and ruin your new desk surface. Fortunately, before this happens, the line always reverses somewhat violently back to the downside. Unfortunately this means that our monetary system has no natural analog upon which we can model a happy ending.

    When comparing the two graphs above you are probably immediately struck by the fact that one refers to a nearly mythical creation especially revered at Christmas time while the other is a graph of reindeer populations. You may have also noticed that our money supply looks suspiciously like any other exponential graph except it hasn’t yet transitioned into the sharply falling stage.

    To get the best possible understanding of the issues involved in exponential growth, while spending only 10 minutes doing so, please read this supremely excellent transcript of a speech given by Dr. Albert Bartlett. If, like me, your lips move when you read, it may take 15 minutes but I’d still recommend it. In this snippet he explains all:
    Bacteria grow by doubling. One bacterium divides to become two, the two divide to become 4, become 8, 16 and so on. Suppose we had bacteria that doubled in number this way every minute. Suppose we put one of these bacterium into an empty bottle at eleven in the morning, and then observe that the bottle is full at twelve noon. There's our case of just ordinary steady growth, it has a doubling time of one minuet, and it's in the finite environment of one bottle. I want to ask you two questions.

    Number one; at which time was the bottle half full? Well, would you believe 11:59, one minute before 12, because they double in number every minute?
    Second Question; if you were an average bacterium in that bottle at what time would you first realize that you were running out of space? Well let's just look at the last minute in the bottle. At 12 noon its full, one minute before its half full, 2 minutes before its ¼ full, then 1/8th, then a 1/16th. Let me ask you, at 5 minutes before 12 when the bottle is only 3% full and is 97% open space just yearning for development, how many of you would realize there's a problem?
    And that’s it in a nutshell right there. Exponential functions are sneaky buggers. One minute everything seems fine, the next minute your flask is full and there’s nowhere left to grow.

    So, who cares, right? Perhaps you’re thinking that it’s possible, just this one time in the entire known universe of experience, for something to expand infinitely, forever. But what happens if that’s not the case? What happens if a monetary system that must expand can’t? Then what? How might that end come about? And when? For an excellent description of this process, please read this article by Steven Lachance.
    A debt-based monetary system has a lifespan-limiting Achilles heel: as debt is created through loan origination, an obligation above and beyond this sum is also created in the form of interest. As a result, there can never be enough money to repay principal and pay interest unless debt is continually expanded. Debt-based monetary systems do not work in reverse, nor can they stand still without a liquidity buffer in the form of savings or a current account surplus.

    When interest charges exceed debt growth, debtors at the margin are unable to service their debt. They must begin liquidating.
    Mr. Lachance reveals the mathematical limit as being the moment that new debt creation falls short of existing interest charges. When that day comes, a wave of defaults will sweep through the system. Which is why our fiscal and monetary authorities are doing everything they can to keep money/debt creation robust.

    But it’s a losing game and they are only buying time. How do I know? Because nothing can expand infinitely forever. The evidence clearly points to exponentially rising levels of money and credit creation. As the bacterium example shows, once an exponential function gets rolling along, its self-reinforcing nature quickly takes over requiring larger and larger aggregate amounts even as the percentage remains seemingly tame.

    Similarly, our supremely wealthy suffer only from an inability to spend what they ‘earn’ on their capital (interest & dividend income) which means their principal is compounding. But, because each dollar is loaned into existence, it means that when Bill Gates ‘earns’ $2 billion on his holdings a whole lot of people somewhere else had to borrow that $2 billion. Taken to its logical extreme, and without enforced redistribution, this system would ultimately conclude with one person owning all of the world’s wealth. Game over, time for a Jubilee, hit the reset button and start again.

    When we started our monetary system, nobody ever thought that we would fill up our empty bacterium bottle. Nobody really thought through what it would mean to society once wealthy people earned more in interest & dividends than they could possibly spend. Nobody considered if it was wise to place 100% of our economic chips into a monolithic banking system that requires perpetual, endless growth in order to merely function.

    So we must ask ourselves; does it seem possible that our money supply can continue to double every 6 years forever? How about another 100 years? How about another 6? What will it feel like when we are adding another $1 trillion every month, week, day, and then finally hour?

    Just remember, money is supposed to be a store of value or, said another way, a store of human effort. Currently it seems to be failing at meeting that characteristic and therefore is failing at being money.

    Who ever thought that oil production would hit a limit? Who knew that every acre of arable land, and then some, would someday be put into production? How could we possibly fish the seas empty?

    We have parabolic money on a spherical planet. The former demands perpetual growth while the latter has definitive boundaries. Which will win?

    What will happen when a system that must grow can’t? How will an economic paradigm so steeped in the necessity of expansion that economists unflinchingly use the term ‘negative growth’, suddenly evolve into an entirely new system? If compound interest based monetary systems have a fatal math problem, what will banks do if they can’t charge interest? And what shall we replace them with?

    Since I’ve never read a single word on the subject, I suspect there’s even less interest in exploring this subject by our ‘leaders’ than there is in being honest about our collective $53 trillion federal shortfall.

    I am convinced that our monetary system’s encounter with natural and/or mathematical limits will be anything but smooth, possibly fatal, and I have placed my bets accordingly. It seems that our money system is thoroughly incompatible with natural laws and limits and therefore destined to fail.

    Now you know why I have entitled my economic seminar series “The End of Money”.

    But the end of something is always the beginning of something else. Where's our modern day Adam Smith? We need a new economic model.

    Dr. Chris Martenson © 2007
    Discussion between Dr. Chris Martenson and Eric Janszen

    Dear Dr. Martenson,

    Glad you have benefited from iTulip over the years. Thank you for the articles.

    I read your piece with interest. My question is, I understand the exponential function for bacteria and reindeer: they breed. But what is the exponential function for monetary growth?

    In the case of bacteria and reindeer, their population stops growing when they run out of food. The “container” never fills because they out-compete each other for available food; the population then collapses.

    The function of money growth is different. If you look at Money at Zero Maturity (MZM), for example, you’ll notice the quantity mostly rises but sometimes declines. In fact, if not continuously supplied with “food”-demand for loans-the money supply falls. This is also the case with bacteria and reindeer: limit the food supply and you limit population growth. Only in the instance of unlimited food does population and money rise exponentially. But in the real world, this circumstance does not occur.

    In Japan, where monetary “food”-demand for loans-was not sustained, the money supply declined, although not drastically as it did in the US in the 1930s.

    While money growth appears exponential, an inexorable exponential function is not apparent. MZM took roughly 200 years to reach $908 billion in 1980, 6 years to double again from 1980 to 1986, 12 years to double again from 1986 to 1998, and 8 years to double again from 1998 to 2006. So it appears that the MZM money supply sometimes takes more, sometime less, time to double. That’s not what I’d expect if the money supply were growing exponentially according to a constant function.

    Hope this is helpful.





    Thanks for your thoughtful reply.

    I did not mean to imply that our money supply is a continuous function that could be described in closed-loop form. If it could, we'd either have Milton Friedman's notebook computer managing things or I'd have discovered the fountain of rich and be fabulously wealthy.

    With sufficient resolution, you would also be able to spot that bacteria populations do not grow with perfect consistency either...some die along the way, temperature changes slow the growth, etc., as well the rate changes as food grows scarce.

    But if we back out a bit, and look with a slightly wider view point, we'd see those imperfections smoothed out. Again, I do not mean to claim that we have a continuous function which would be characterized by either a consistent or shortening doubly time. But we do have what appears to be a continuously compounding function which is apparent on the graph below except for the 1994-1995 timeframe which I briefly discuss below.

    Also, for a variety of reasons I prefer to use M3 over MZM, so I have not had a chance to apply much analysis to MZM. But I will note that when I apply an exponential fit to M3, well, as a past research scientist, I salivate over R^2 that are better than 0.80.

    M3 Money Stock vs Exponential Curve on a linear scale
    (data from economagic + missing data recreated to present by

    If it looks like, smells like, and quacks like an exponential function... we may need to consider it one.

    Despite not having a continuous exponential function, I find the exponential description to the be most useful analogy to describe our money system because, to be "healthy," it must expand.

    In my mind, the moment in history when we (and by "we" I mean Alan Greenspan) did the most wrong thing imaginable can be viewed on the graph above as the period of 1994 to 1995. M3 was flattening out, Alan was making his infamous irrational exuberance speech, and meanwhile was putting the finishing touches on the launch pad of our current blow-off by reducing reserve requirements effectively to zero (currently at 0.4%) by changing the regulations to allow sweeps. But I digress.

    The point I was trying to make is that our money system works great in forwards but has a real nasty time of it in reverse or even neutral. There's only so much farther forwards we can go; a moment which I believe we will experience in the next 10-20 years.

    Unless Iran blocks the Strait of Hormuz. Then we'll experience it a whole lot sooner.

    Again, thanks for your reply and the chance to stress-test this thinking a bit more.

    All the best,




    Points taken. Don’t know if you read Aaron Krowne. A researcher by training, he came across the reserve requirement change you refer to that explained a mystery I’d been writing about for years: why did all of the charts, such as money supply, foreign debt holdings, and stock indexes, inflect in 1995? Answer: changes in reserve requirements and sweeps in 1995.

    What (Really) Happened in 1995?

    Still, critics are open to ask, will the exponential money growth function–whatever it is–ever cause the money supply to begin to double in shorter and shorter periods of time to reach a terminus and collapse as you suggest: a few years, to a year, to a few months...

    The process you are describing is hyperinflation. Perhaps my acquaintance Paul Tustain of BullionVault, a high tech company CEO and a fellow very well self-educated in finance and economics who founded BullionVault, has an answer for us in this piece he about the nature of hyperinflation. He borrows the concept of valence from chemistry to make his case:

    Hyperinflation is about unattractive money

    Glad to print your article. With your permission, I’d like to include the thread of our email discussion. Those of us who are critical of The System need to be more intellectually rigorous than its followers; using the main elements of this discussion helps make the case.





    I had not read that piece by Aaron. What a fantastic bit of detective work. I've sent him a congratulatory email.

    I am now even more certain than before that our easy money, credit crack-up boom is going to require such a massive amount of bailing out that the S&L crisis will look like a kindergarten bake sale.

    I'm going to re-read that piece more carefully later and then chase the links down. Thank you for bringing that to my attention. It should be updated and re-run?

    Next, I am in full agreement with you about the level of rigor. Of course the buy-side cheerleaders can get away with any old sort of nonsense but those who dare to question the central premises need to be as scrupulous as possible. Indeed, I am always looking for strong challenges to my data and viewpoints; as a scientist by training I regularly develop, reject and accept hypotheses as the data changes and peer review is both a necessary and desired part of the process.

    Accordingly, I think it would be an excellent idea to print the email exchange.

    Lastly, I concur with Paul (good article by the way, thanks again) about the nature of hyperinflation; it would be a mistake to think that it could only result from fresh printing of new money by the government. We have several generations of excess printing already 'out there' and that is the primary reason I am a long term buy-and-holder of gold & silver. When (not if) those magic checks get cashed we'll essentially have two generations of excess spending to contend with... and the only way I can see for that to be resolved is to destroy future purchasing power. So yes, I am in complete agreement there.




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