Governments push out credit by means of buying bonds. They pay for the bonds by printing debt notes. On their ledger go the bonds as assets and the debt notes as liabilities. What we know as paper ‘money’ are actually IOUs – the opposite of money.
When central banks buy bonds, it drives their price up and makes them less available to other market participants. The driving up of bond prices automatically and mathematically lowers interest rates. Bonds become less available to market investors and also pay a lower return. Consequently, market investors chase higher returns by bidding up other assets – namely stocks and real estate.
This is the mechanism by which low interest rates drive up asset values.
Pension funds are being kept alive only by overvalued assets. Interest rates must continue to fall so that governments can service their debts, but also so that asset prices stay high and don’t collapse pension funds. Thus, government bond buying and credit expansion must continue.
The problem is unintended consequences. One of which is, that as interest rates continue to fall, so more and more people will withdraw their notes from the banks. That is why, despite my previous incredulity, cash will be banned. It has already begun.
We really are approaching the last roll of the dice. A cash ban is a partial default on the IOUs; it is the tacit acknowledgement that governments cannot pay their debts.
The excuse for the cash ban is the curbing of criminal activity; the reality is that it serves to prolong the criminal activity – of governments. But not for much longer. Nothing will collapse the real economy faster than the withdrawal of cash.
“If a thing cannot go on forever, it will eventually stop.” Herbert Stein