What Went Wrong?

BALTIMORE – We are searching for an insight. Each time we think we see it… like the shadow of a ghost in an old photo… it gets away from us. It concerns the real nature of our money system… and what’s wrong with it. Here… we bring new readers more fully into the picture… and try to spot the flaw that has doomed our economy.

Let’s begin with a question. After the invention of the internal combustion engine, people in Europe… and then the Americas… got richer, almost every year. Earnings rose. Wealth increased. Then in the 1970s, after two centuries, American men ceased making progress.


Lenoir-Engine1859: Frenchman Etienne Lenoir builds a  double-acting, spark-ignition engine that can be operated continuously. The internal combustion engine is born.


Despite more PhDs than ever… more scientists… more engineers… more capital… more knowledge… more Nobel Prizes… more college graduates… more machines… more factories… more patents… and the invention of the Internet… after adjusting for inflation, the typical American man earned no more in 2015 than he had 40 years before.

Why? What went wrong? No one knows. But we have a hypothesis. Not one person in 1,000 realizes it, but America’s money changed on August 15, 1971. After that, not even foreign governments could exchange their dollars for gold at a fixed rate.

The dollar still looked the same. It still acted the same. It still could be used to buy booze and cigarettes. But it was flawed money. And it changed the whole world economy in a fundamental way… a way that is just now coming into focus.


Honest Money

The Old Testament tells us that God chased Adam and Eve from the Garden of Eden with this curse: “By the sweat of your brow, you will earn your food until you return to the ground.” From then on, you worked… you earned money… you could buy bread. Or lend it out. Or invest it.

Dollars – or any form of real money – were compensation… for work, for risk taking, for accumulating knowledge and capital. Money is information. It tells us how much reward we’ve earned… how much things cost… how much profit, how much loss, how much something is worth… how much we’ve saved, how much we’ve spent, how much we need, and how much we’ve got.


gold distater A “Flying Nike” gold distater of Alexander the Great (336-323 BCE). Ultimately, only a market-chosen money can be sound. The market chose gold as the most marketable commodity. There were no meetings or committees deciding on this, it happened spontaneously – governments simply usurped it.


Money doesn’t have to be “hard” or “soft” or expensive or cheap. But it has to be honest. Otherwise, the whole system runs into a ditch. But the new money was a phony. It put the cart ahead of the horse. This was money that no one ever had to break a sweat to get. It was based on credit – the anticipation of work, not work that had already been done.

Money no longer represented wealth. It now represented anti-wealth: debt. So, the economy stopped producing real wealth.  The Fed could create money that no one ever earned and no one ever saved. It was no longer the real thing, but a counterfeit.

In this way, effort and reward were cut off from one another. The working man still had to labor. But it was the banker, gambler, speculator, lender, financier, investor, politician, or inside operator who made the money. And the nature of the economy changed. Instead of rewarding the productive Main Street economy, it rewarded insiders… and the financial sector.


US-financial-corp-profit-shareFinancial profits as a share of total domestic corporate profits – by the mid 2000ds it had increased to 40%. Something had clearly gone wrong – click to enlarge.


The penthouses of Manhattan and the summer houses of the Hamptons changed owners. Gone were the scions of Detroit factories and the titans of New York commerce. Gone were the people who had added to the wealth of the nation. In their place were the Wall Street hustlers… the people who moved money around… taking it from the people who made it and giving it to the financial industry, the money lenders, the insiders, and the Deep State.

This process is misunderstood. It is thought that Wall Street greed and deregulation caused the shift. But Wall Street was just as greedy as it always was… And financial regulations increased dramatically throughout the entire period.


US-tfp-vs-fin-shareFinancial sector profits and economic productivity – a suspicious inverse correlation – click to enlarge.


It was not human nature that had changed; it was the money. And it changed everything. Stay tuned for more on this story.


Charts by FT


Chart and image captions by PT


The above article originally appeared at the Diary of a Rogue Economist, written for Bonner & Partners. Bill Bonner founded Agora, Inc in 1978. It has since grown into one of the largest independent newsletter publishing companies in the world. He has also written three New York Times bestselling books, Financial Reckoning Day, Empire of Debt and Mobs, Messiahs and Markets.



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13 Responses to “The Fatal Flaw That Has Doomed Our Economy”

  • therooster:

    I’ve been a networker in business development for over 22 years. BitGold has now amassed over 700,00 members in a matter of less then 9 months. Do you have any idea how aggressive that ranks from the standpoint of growth ?

    Now consider that the merchant tools have not even been released as of yet and the USA accounts only have the buy, hold and USD debit card features at this moment. They do not have the direct account-to-account gold transferring feature (P2P) that the rest the world enjoys …. what the Greeks are calling 21st century “fishes & loaves” in consideration of the fact that there are no transaction fees for “on the platform” gold bullion transfers. They are FREE. No friction.

    I think the banks have done a wonderful job in this clandestine endeavor …. you ? ;-)

    Ohh…. and based on what you said about BitCoin, you should appreciate that crypto’s are essentially digital tulips with no precious metal backing. BitGold is not a crypto currency based on intellectual capital. It’s gold backed 100%, gram for gram ….. and supported by the sweat of the brow.

    Cover your shorts in gold. Thank me later.

  • therooster:

    Dwain … am I reading this right ? Are you suggesting that BitGold, Brinks and PriceWaterhouseCoopers are all lined up together to perpetuate a scam ? This question is without considering that the company (GoldMoney.com) is publicly traded on the Toronto Stock Exchange.

    If this is what you’re suggesting, you’ve just put cynical and suspicious on whole new level.

    Why would anyone go so far as to steal a few eggs when they have a perfectly good goose ???

    • BitGold, like Bitcoin, is nothing more than a passing fad for a few suckers and sheep who want to feel “special”. Global annual GDP is running at about $65-Trillion, what kind of a dent do you think a few people playing around with BitGold is gonna make in that? It will never amount to anything more than a novelty.

  • therooster:

    Dwain … You said –> If the gold is not put in your hand at the end of the transaction, then someone owes you the gold, that’s debt.

    The supply of gold is ALREADY created. The work and labor has already manifested in regards to the gold that is vaulted. Nobody has created any credit from thin air. The bullion is callable on demand. The ownership in the vault changes hands if there is no calling of the bullion. This is why they have the PWC real-time audit system. The only unit of account is mass.

    Fiat currency differs because the fiat credit can be created from thin air, not from a real asset. There’s no real supply discipline. When a new loan of $100,000 is created, there is no callable asset to back the supply of new currency. BitGold , by contrast, has no such dilution. Currency with mass as the unit of account is created on the basis of the bullion you own, outright and has a 1:1 ratio with the vaulted reserve. It’s very simple.

    BitGold makes no loans and creates no credit. They are only a distribution portal for the digital weight. You have to load your own account with unencumbered bullion.

    Don’t pretend to understand the model. Study it.

    • rooster… Here I thought you were talking something serious, but it turns out, you’re just talking up a fad novelty toy, a trinket, like those electronic pets a few years back, something to play with while pretending you’re accomplishing something other than lining the pockets of those producing the toy….


  • therooster:

    I don’t have the time to babysit this conversation. You’re still stuck in top-down thinking, a whole shift of paradigms is still in front of you. Enjoy it. It’s quite rewarding.

    Study the BitGold model. There are three business entities involved in each transaction and also the account holder(s) involved in the transaction.

    The 3 entities are

    1) BitGold, the interface and the account manager/web connection tool (think of it like bullion based PayPal.)
    2) Brinks (1859) is the holder of your gold, allocated and segregated. It is shielded from any bankruptcy that could possibly occur with BitGold and/or Brinks
    3) Price Waterhouse Coopers is the auditor with a state-of-the-art audit system that operates 24/7

    The currency is digital mass with grams being the standard unit. BitGold is in over 200 countries. The USA is the one exception to service that is available right now. The USA accounts are only “Buy and Hold” with access to USD’s via the gold holdings which can be loaded onto a USD MasterCard debit card. Direct gold transfers are available to the rest of the world, currently, in P2P context. They also have access avalability to funds in their local national currency. There are also integrations for one’s bank account and even bitcoin.

    Nothing happens that each entity does not have a record of, including the user(s). Audits very are uncomplicated because mass is the only unit of account in the system. There is no credit or unbacked derivatives of any kind.

    No disrespect to you but I think you need to catch-up with the leading edge of what is providing debt-free liquidity to the world.

    • Yes, study another imaginary debt based pseudo-currency, yep that will fix everything.
      If the gold is not put in your hand at the end of the transaction, then someone owes you the gold, that’s debt.

      You know, the fiat system started the same way. Trust those who hold and account the money to always do the right thing. See where that will get you…

  • therooster:

    Dwain , the whole fiat currency exercise, IMO, is a process that has brought about floating trade values for bullion, such that we can now price widgets in fiat currency and settle with debt-free bullion mass. The contrast on how to price and how to settle has been paramount for the sake of liquidity, while also maintaining classical debt-free status that gold has always enjoyed. Call it “liquid gold” if you like.

    The value in the fiat development is the price model for the sake of price comparison and the ability to let two debt-free widgets trade for each other without the use of debt. Gold is a debt-free widget.

    The dollar can be likened to a segment of sting with two distinct ends, one being the currency (debt) and the other being the pricing model. It’s the pricing model that is of great value and interest because of the support that it gives to debt-free trading.

    There was no way to bring about the development of that much sought after price model without the dollar working its “apprenticeship role” as a floating (debt) currency, however. The stop gap function of the currency role is what has given the price model (at the other end) the history and market traction to be a comparative trading tool for debt-free trades. The stage is now set.

    This is why we are seeing a re-emergence of gold as a market currency with fully scalable liquidity …… because we can !

    Everybody wins, even banks.

    You cannot pour new wine into old wineskins. Thank God for the information age.

    • And if you don’t possess the bullion to settle?

      The U.S. legal tender dollar, a.k.a. Federal Reserve note, is not “a floating (debt) currency”, whatever that’s supposed to mean, it is a debt free legal tender currency.

      You should attempt to work some semblance of logical coherency into your writings, or at least, define the terms you are using so that others may attempt to follow your line of reasoning.

  • Another undesirable aspect of running perpetual deficits is that the concept of saving must inevitably be subverted and conflated with investing.

    Whereas saving is merely foregone consumption and thus does not contemplate risk, investing does.

    As the sovereign debases the currency savings are undermined pushing would-be savers into becoming investors.

    Investors must necessarily operate through the finance industry which in turn skims of the top of every transaction… thus concentration of wealth and title… and so on, and so forth…

  • It seems to me that you are failing to account for private property.

    The use of gold, cigarettes or salt in order to engage in an exchange, means that individuals can exchange things that they own outright.

    If you agree that your time, your skills and your ideas are your own natural property, then our current variety of money presents a problem. Essentially, by accepting the unit of account that is unilaterally imposed by the state, we are all exchanging something we own outright (our labor) for something we do not own and have no control over.

    But the state does not only impose this arbitrary unit of account. It also chooses to run deficits as a matter of course AND awards management of the monetary system to a third party that does so behind closed doors.

    It seems to me therefore, that this monetary system imposes asymmetry in the value of the exchange. This asymmetry is further compounded by devaluation and taxation.

    Incidentally, as the rate of devaluation increases, so must fiscal pressure in order to make up the difference.

    Thus as taxation increases, property rights are undermined.

    In conclusion, I would say that this monetary system is arithmetically geared towards the concentration of profit thus of title.

    I conclude therefore that we won’t be able to come out of this impasse till some degree of private property can be restored that would enable individuals to accumulate unencumbered wealth.

  • therooster:

    Bill…. Just wondering if this most recent post with a focal point of 1970 is attempting to zero in on the ending of Bretton Woods in 1971 ?

    Many people think of this as the beginning of the end of the dollar. In fact, it represented a new monetary beginning on the basis of a new process taking place that could lead to debt-free trades with fully scalable liquidity by market demand. We are now entering into the long awaited benefits where bullion’s mass is now a monetary unit of account (currency) and the dollar takes on a role as a comparative price measurement model in order to support debt-free trades.

    The real beauty of the USD is not on the “currency end” which is debt based, but actually occurs on “the other end” within the price model that’s been created. The price model allows for the price comparison of two debt-free widgets in the support of direct trading, debt-free. Simply make bullion one of the widgets in the trade.

    The dollar’s tenure as a currency (floating debt based medium of exchange, post 1971) has been a necessary evil in the process. If you think of a dollar as a segments of string, the two distinct ends (applications) come into better focus, one being a currency (debt), while the other is the price model. The price model is the real gem.

    • Bretton Woods had next to nothing to with the massive explosion in asset backed, debt based credit that the Fed and the banksters pawn off as being “our money”, you can thank the advent of direct deposit and electronic banking for that. That Bretton Woods ended as electronic banking was taking off, was just a coincidence, not causal.

      The U.S. monetary system became a 100% fiat system in 1933 when FDR stole the gold money and replaced it with legal tender paper money.

      Funny term “fiat money”, it means inconvertible paper money made legal tender by a government decree. The U.S.G. owns the fiat that is the legal tender for all debts, public charges, taxes, and dues, yet, the U.S.G. is in debt to the tune of $19-Trillion. And what does it owe in payment? The legal tender it owns. For 82 years they’ve been accounting the Fiat Currency as if it is gold money that the U.S.G. must tax and borrow in order to get and spend. And during that entire time, I don’t recall anyone standing and saying, “hey, hang on here, something ain’t right with this…”

      Did you know that neither the Fed or the banks possess the legal authority to create money? Did you know that there is no law anywhere that designates or acknowledges the credit the Fed and the banksters do create as being a legal tender, a money, a currency or a medium of exchange? Did you know that the only legal validity credit has, is given to the debts incurred with its use?

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