The Central Bank Scheme is Doomed To Failure in the Global Economy
The primary concern of any Democracy must be to maintain Democracy and the liberty of its citizens.
The basic “principle” behind most national economies over the historical period has been this : The government, by some means or other obtains gold, or food, and then creates a currency with its authority and bases some part of this currency on both its authority, and its assets. It then required work to be done, and paid for this work in the currency of authority. Any wars, or buildings, or administrative salaries would be paid for by the government as needed.
But there would also be a tax to reckon with. Once the government distributed this currency, and probably redistributed wealth in the process, all subjects would have to recycle this currency through the government by paying their taxes. It was a simple system, but it basically worked.
Of course all governments were free to change the currency asset basis at will, if they had the power or necessity to do so. So a currency worth one ounce of gold, could easily be turned to a currency worth half an ounce of gold, as needed, and as far as the government could get away with it.
At its inception the United States was no different. It too had a currency, and it was based on the “gold” standard. But because the United States was for a long time a quasi Federated collection of states, and because this naturally led to a strong inclination towards a “Free Market” where individuals could own their own property the original economic system governing the currency of the nation needed change. Since it would be especially subject to the decisions of a privately held wealth, and sometimes these decisions were very negative to the general economy. In times of depression, there would be a severe lack of both currency, and credit.
Something new was needed.
Contrary to common public perceptions, the Federal Reserve System of the United States has not been around since the beginning. Rather, in its true present form, it’s really only been around for about thirty years. Prior to that it had been in its “formative” stages, and not until Alan Greenspan assumed control did the Federal Reserve take on its present form as a provider of nearly unlimited virtual credit, and unlimited debt.
The Federal Reserve system was created in 1913 for the purpose of limiting deposit runs on the banks. They figured back then that if there was to be a run on the bank, the Fed could step in and provide the credit needed to prevent this, essentially by becoming the primary lender. At that time, it was assumed that the government would have the “assets” to do this, through both private loans, from the banks, and through various purchases of the Federal Reserve itself. It was simply a temporary insurance policy against the debilitating currency contractions of the depressed economic conditions of the time.
This system was originally meant to be temporary, to deal with particular problems. But later, within ten years actually, it was made a permanent feature of monetary policy in the United States.
After awhile it became quite possible for the Federal Reserve to get past the asset restrictions of issuing a currency, and credit. That is to say, the Federal Reserve would no longer need to have the assets, or the gold needed to issue new money. It could issue credit, by essentially debiting itself-based on the “full faith and credit of the United States Government”. Credit had from this point on, become virtual, and with a push of a button, the money was created out of thin air.
What it does, in the very simplest terms, is it manufactures money in the form of credit. If a bank needs credit, in effect the Federal Reserve has the right to push a button and say “here’s a billion dollars credit” and we will just mark this on our balance sheet. This is what it does in the simplest possible terms.
However, it is anything but simple.
Since the time of its inception, the Fed has taken on some new features. The most significant had to do with something called the Bretton-Woods agreement. What this convention accomplished, up in New Hampshire, was to allow the U.S. dollar to become a “floating” currency. That is it could be bought and sold relative to other currencies, without having to be tied to Gold. Therefore the “Markets” could determine exactly what this currency, the dollar, was worth. In effect the U.S. Dollar’s true value became a matter of “opinion”.
But here’s how that ties into the Federal Reserve. The Federal Reserve could now release gigantic amounts of credit into the economy without actually having the assets to back that money up. So now, depending on what the Federal Reserve did, the dollar could go up, or down in relative value, according to the interpretation of the world’s markets concerning the actual value of the dollar. If they liked what the Fed was doing the dollar went up in value, if they didn’t, well it went down. The “view” was also based on how well the American economy was doing as well.
Now it should be mentioned right from the start, that from this point on the Money Supply-the actual amount of money in the whole economic system of the U.S. would be solely determined by the amount of credit released. It was all now credit, and its twin sister, debt.
So if the Fed released a lot of money into the economy through credit, the dollar would initially go down. Natural since the more dollars around, the less each must be worth, at least initially, before any real work was done on the economy to back them up with the real assets of the economy, such as buildings, or companies, or purchases of commodities etc. If on the other hand the Fed took money out of the system, well then, the dollar would go up in value since that would mean that less dollars now represent the underlying economy.
So in effect the Federal Reserve could establish just how much the American currency was really worth on its own, at any given time, given a fair opinion by the market. It could produce voluminous amounts of this currency virtually at will, as long as the “market” didn’t mind too much.
But another rather important advent, which should not be missed is how the Federal Reserve became the bank of the U.S. Treasury. Remember, the simple plan of all economies is to have the government organize society through its authority, but it needs to deal with money to do that. And so the Treasury comes in, now fully aligned to the Federal Reserve system.
The Treasury had to adjust to the pure credit system by being able to borrow money. Either from the people, or if need be from the Federal Reserve. Which is one reason the Fed is still considered a semi private institution. It wouldn’t look good if the Treasury were borrowing money from a public institution since that would be the same as borrowing from itself. And so the Fed became a nominally private institution.
The Treasury is essentially charged with borrowing money for the purpose of spending it on government projects, and then, through taxation, to balance that debt with credit. If we want to build an air craft carrier, we just borrow the money. We do that by sending a Treasury note over to the Federal Reserve, they give us the money, and then they are supposed to sell the note to the public.
However, this all depends on what the Federal Reserve is “thinking” at the moment. If they want to tighten money supply, they sell this piece of debt to the public. This removes money from the U.S. economy, but of course it will also crimp tax revenues. Or, if they want to loosen money supply, that is make more of it, well they just keep the note, or even buy other notes out there and send that money into the economy-and this will increase tax revenues. This is the very simplest of actions. But it is anything but simple in practice.
The key here, is that it’s all about Credit! The government is not selling you a cow, or a horse for your money loaned, it’s not providing a service of any kind, it’s just borrowing your money for some particular purpose. And in reality, all money, does belong to the “People” since all money is originally created with the push of a button that creates money endowed with the “full faith and credit of the United States”.
But the government does not really have to borrow anything at all from private individuals. Actually it can just borrow from itself. If instead of selling that Treasury bill, the Federal Reserve just puts it away, and the money is promptly sent to the Treasury, it simply gets written up as a deficit on the Federal Reserve’s balance sheet. It is in fact “printing” the money, at least temporarily until the tax payer pays the debt with hard earned money-if ever.
All money is credit, and debt
So far so good, at least its relatively understandable. But here’s where it gets cloudy and complex.
The fact is that all money in the system is now in the form of credit, and its alter ego, debt. When you have a dollar to spend, after working for an hour, you now have a credit, which you can apply to your debt. For example if you owe the bartender a few hundred dollars you now give him a dollar, and maybe he’ll let you have another drink, on credit of course. If you want to buy a car, you can borrow some money and now you have credit enough to buy the car, but you are now in debt to the credit provider.
To get credit, you must either borrow it, or work for it. If you borrow, you will owe, if you work, you will be owed, until paid. The important thing to understand is that it is all a credit or a debt, not an asset.
An asset you own, it is yours if you paid for it. Or so it should be. A dollar however is not an asset, it’s not a piece of gold in your pocket, or a property you live on, it’s only a credit towards someone’s debt, since all dollars are actually produced out of debt. Therefore under this system, only debt exists, no matter where or how, everything is subject to a collection-remembering that taxation is a chief method of recycling debts.
Dollar Doomed to Failure
But there is one more crucial difference between a dollar and an asset. Whereas an asset is indeed subject to the vagaries of supply and demand, just like everything else, it is not by design made to depreciate. Yes, assets do depreciate, as for example a computer. Over time it becomes less and less effective, older and more cranky, and thus less valuable. But it is not in its essence designed to do so. A piece of Gold never depreciates intrinsically in reality, it is not deformed or damaged by the winds of change-at least not noticeably. It is always the same, and at the right time can be sold for an even higher price than it was purchased-relatively speaking, and assuming a proper timing in economic cycles.
However, not so the dollar. The dollar is designed to depreciate, and this is because of Bretton Woods and because of the Federal Reserve. By its design the dollar will lose value. In fact, it must lose value.
Now it was not originally designed this way. Once it was based on Gold, and Silver coinage. It had a certain permanence to it. But once the Federal Reserve took over monetary policy under the scheme of Bretton Woods, the dollar forever lost its permanence. It cannot last in value.
Oh to be sure, it was at first argued, though I was not there and cannot know for certain, that with savings rates at the local savings bank, and low inflation, and high production the dollar could be just as long lasting as a piece of Gold, only more flexible. But this was never so under Bretton Woods, nor could that ever be. A bank is not going to give you a savings interest greater than the going inflation rate. And if it did, it would have to rip off someone else to do it. Most likely the government, therefore you.
And as for production we can say that yes the underlying economy might expand as credit is issued , but the interest accrued must be paid, and interest can never be Zero in the natural economy. In a complex economy things must cost more than they would be in a simpler economy. Therefore they will cost more because of that expansion. Therefore even if the dollar did not lose value through monetary depreciation, it would still lose value because of the natural expansion of the economy, should the monetary expansion actually succeed in growing the underlying economy in the first place.
Along with Natural Growth must come efficiency. That is if an economy grows, so too its ability to provide milk to its citizens for example. If it can’t, or if its citizens must work too hard for a gallon of milk then growth is not efficient. Therefore the argument that things should cost more as an economy grows is not unlimited. If it is happening at too high a rate, then efficiency has not been reached. The natural problems of economic growth will dictate this, but normally, prices should not rise to the extent that natural efficiency, and economic transmission from cell to cell is hampered. If that does happen, the economy will contract no matter what the monetary policy does.
Therefore inflation will occur during any growth period. This is natural, but in due time it should return to normal if the natural order of the economy is followed. That is sooner or later a steady state will be reached, if the natural order is obeyed.
But the dollar, as it is designed will lose value whether the economy expands, or contracts. Moreover, since more credit is needed as the economy expands, more dollars must be circulated-exponentially- for various reasons. Whereas a piece of gold might actually gain value in contraction, a dollar will not. At least not by design. What gains there are in the dollar, would only be temporarily apparent and be due only to a loss in circulation, and the temporary unavailability of credit during a contraction. But in reality, any dollars in circulation, which are representative of the underlying state of the economy, will intrinsically lose value, and their value going forward, will also be mitigated since to rekindle the economy would under this system take an increase in lending, and an increase in dollar circulation, and volume. By design the dollar loses value-disregarding the vagaries of supply and demand. By this logic, the best time to buy anything with the dollar is during contractions.
Large National Economies
The problem with nations that are very large in population, as most major economies today are, is that the natural limits may be reached all too quickly. These limits may be pushed beyond that limit, but this will only result in natural inflation, and in resultant debt as efficiency cannot keep up. Both inflation and debt will raise the true cost for products, and so increase the natural drag on an economy in addition to any other headwinds present. That is to say pushing an economy beyond its limits has a cost all by itself regardless of the apparent magnitude of inflation caused by monetary policy, or natural dynamics of growth.
Should this natural price increase get out of hand, or become part of systematic flaws in the monetary or banking system, then the outcome will be doomed to failure, and the final consequence will be disastrous.
Assets and Banks
Now we should make clear at the outset, that we are not saying that the Federal Reserve is of no value. It is of value, and can be of more value. The Fed can work, but not as it is now. Once the vast economic inflation took place under Bush Greenspan, it was probably too late to real it in normally. Now nothing short of a complete overhaul will probably have to be attempted, and if a collapse occurs, or if a prolonged period of global economic malaise sets in, will be attempted with little choice otherwise.
As the Fed is now, and especially after Bretton Woods, it is essentially forced to inflate the economy ad infinitum. The reason for this is that without this inflation, asset prices would fall, and these could not then be used as collateral for borrowing more money. The simple truth is that most assets, with the exception of metals, rocks, or in general things that do not significantly degenerate as time goes by, will actually depreciate intrinsically. Even gold in some way depreciates extrinsically since there is a cost to keeping it safe and free of debris etc. Depreciation is natural and cannot wholly be avoided.
Even corporations depreciate. Perhaps the best example might be ATT which though once was the giant of communication is today a lot less and is easily outpaced by companies such as Google, Apple and Microsoft. Eventually these too will depreciate since their assets will in time depreciate, including their intellectual assets, as will mine. No one in the fifties could have imagined that General Motors would go bankrupt. But such is the nature of depreciation.
But if these assets depreciate over time, then there would come a time when no more money could be lent, or too little money could be lent. Since all money must by design come back to the Federal Reserve, (and this is absolutely critical to note here) there would soon be no money left in the United States and the system would grind to a monetarily induced halt. So new assets must be built.
Banks too must have their interest if they are to remain strong enough to lend. In a natural economy if one were to lend a pound of wheat one must expect some return on that pound of wheat lent, or else there would really be no incentive to lend it in the first place. Yet the Federal Reserve at present takes no interest and is in fact receiving no interest, which as we have said elsewhere actually compromises the system itself. The point is that in a system like this, asset prices must be kept artificially high in order to facilitate lending, and if they are not, the system will collapse. The banks are the credit “transmitters” as are assets the “receivers” and both of these require extra credit merely for their own functioning, and appreciation.
If banks fail to receive their fair share, they will stop functioning. In some sense this is actually what happened during the Great Depression, and later in the Great Recession, and this why “Helicopter” Ben Bernanke, the former chairman of the Fed promised to dump helicopter loads of money into the economy if need be. And he did, in fact he dropped whole cruise ships of money into the economy during the Great Recession of 2008 in order to reinvigorate the banking system and asset prices to the point where lending could once again take place.
Unfortunately the Federal Reserve can increase credit, but it cannot necessarily increase either velocity, or volume in a natural economy-and actually decreases efficiency-at least temporarily as it increases money supply. And if the natural economy is resistant to any increase in credit, pushing the matter only makes things worse, as more and more money piles up in useless inefficiency. When failures occur that money used is simply dumped into the economy and causes little more than inflation until it is ultimately sucked back into the system either through taxation, or the purchase of products or services. But that can take awhile, and in any case it is money that ultimately loses its direct connection to the banking system and will cause inflation in the rest of the system.
The Great Recession probably left a great deal of loose money floating around and will be responsible for some of the slowness that can be seen. As businesses fail, money loses its efficiency and this causes a drag on the natural economy.
When the Fed sees this however, their only real option is to dump more money into the economy in the hope that the extra volume and velocity will suck all that “loose” money back into the system. However, that has the price of adding yet more inflationary pressures to the overall economy.
The Fed can create credit at its whim, but there is absolutely no guarantee that the Natural economy is going to respond. If a population is sleepy and has a headache, and a hangover, and doesn’t want to do anything, no amount of credit is going to get them to respond.
The reason none of this is likely to work in the long run is because the real Natural Economy, and the artificial Credit economies generated by Fed monetary policy are really not the same, and don’t need to be.
However, each action the Fed takes, whether it is to increase the availability of funds in the banking system, or to increase asset prices or number of assets as “receivers” of credit, there will be a real cost to the natural economy. In other words it’s actions do have a real cost. What potential the underlying economy may have in this sense, may be misdirected, possibly wasted, or also accentuated. Much of what the Fed can and cannot do depends on the natural timing of the underlying real economy.
Causes of Inflation
Excepting the vagaries of Supply and Demand, real inflation has two primary natural causes and these are population growth, and complexity. As the population grows so does the need for supplies. As the complexity grows so does the difficulty in distributing these supplies and services, as well as needing more energy and resources to keep this added complexity going. Thus these two factors are the main reasons for natural inflation in a natural economy.
But these factors are often exaggerated by the Federal Reserve and the Bretton Woods system. Since the Federal Reserve needs to atone for any credit given by providing for the interest to be accrued, both its own and for the banks using the money multiplier, there will always be a requirement for more credit to be issued. Banks being the primary transmitters of credit must be healthy enough to do their job. And so more credit needs to be released for their well being.
But in order for more credit to be issued, asset prices must continue to rise, otherwise there can be no justification for issuing credit. Since assets are actually the “receivers” of credit, they can only work if they are healthy as well. Certainly it’s hard to get a loan if you have no money, no job and no asset.
The way to inflate asset prices, as far as the Fed can ever see is to increase the money supply, and this can only be done by issuing yet more credit. If the banking system, gets too sluggish, of if assets get too depressed, then Quantitative Easing would have to step in and allow the Fed to issue credit directly, and that’s exactly what they did.
So for these reasons we can see that the Federal Reserve system is doomed to increase the debt no matter what happens. If the economy grows, there will be a need to increase money supply, thus increase the debt. If the debt increases, there will be a need to increase the debt again, since interest must be paid. If the population increases, or velocity increases, or volume increases again the Fed will have to increase debt simply to facilitate these growths. If there is an economic contraction, once again the Fed must increase debt so that it can “rekindle” the economy. But in all these actions, there is an inherent need to increase the debt again, and again. Thus the debt never decreases, and in essence can never be wholly repaid.
Aside from the Carter Volcker contraction of the money supply which was done a few years after the Bretton Woods agreement, and probably done with purpose, there have not been any contractions in the money supply at all. The reason is that the money supply cannot be contracted at all under this system. Moreover the rate of growth cannot be slowed. And all the while the dollar is doomed to being worth less and less-except during economic contractions, and then only temporarily and apparently so. But does that make sense?
The underlying systemic flaw is that the natural economy must contract at some point in time. The real economy cannot simply grow without pause as the Federal Reserve’s monetary system would imply. For many reasons which we have discussed before there comes a time when the natural economy has to stop growing and start contracting in order to gain the efficiency needed to go on growing in the long term. The Federal Reserve System simply does not allow for that. The Federal Reserve Credit Debt System requires an endless growth of credit, and an endless growth of Debt if it is to survive. This is in part due to the Bretton Woods agreement which has created a floating currency that is based on nothing but virtual credit. There are no natural limits to the amount of currency that can be released into the economy under the Fed’s system. In fact the only real option under this system is to release ever more credit and therefore ever more debt. The deficits which we see are never going away. All of this money borrowed is never going to be repaid.
All Assets Lose Value in Complex Economies
There is also another principle which may spell tremendous heartaches up ahead. It turns out that even while any growth in complexity or population will cause inflation, asset prices themselves are due to depreciate. The reason is that the more an economy grows, the less the actual value of any particular asset.
To illustrate this we can for example take a Van Gogh painting. At first it will be worth little as the fame of the painter is not well known. But as time goes on, the quality of the painting will become known and its asset price will appreciate exponentially. Recently a Van Gogh sold for tens of millions of dollars at auction for example.
However, that appreciation is not permanent. As the economy grows more and more complex, given a fair distribution of wealth(and this is critical) we would find that there are simply too many other alternatives to holding a Van Gogh. For example a cluster of Monet paintings may come to market, or Picassos, etc. More than this, as the economy grows more and more complex, there will be other painters, other artists, other products that will more and more compete with the Van Gogh, no matter how “priceless” each is assumed to be. There will come a time when a buyer, even if he had the money to purchase a Van Gogh, would be hard pressed to spend it on a Van Gogh, or perhaps just buy a town house, or an apartment building, or a freighter. The choices would grow, and the psychological attention towards a Van Gogh would eventually wane.
But this is just an extreme example of a painting one would assume is “priceless”. On average other commodities, or products or services(for even services are in reality assets for those workers who only have their trade to offer) will in time lose their value as more and more services and products and commodities(in the broad sense) are required to keep the complexity of the economy growing. Therefore, even trades, or practices, buildings, corporations, , commodities and even well established works of art lose their value the more complex an economy grows. This does not bode well if any true significance of this principle is validated by the processes of the natural economy.
It would explain why for example Japan has struggled to maintain the value of its assets. It would explain why after all the huge amounts of money dumped into the economy, there is still the tendency towards deflation. It would explain the rising debt levels that have not yet stabilized the economy. Even while costs for services and products will climb, the net asset price will fall.
The more complex the economy gets, the more acute this asset depreciation becomes.
The Fed Can Amplify Natural Depreciation
But if this is true, the actions of the central bank bode ill for the economy going forward. So far assets, both receivers of credit, and banks transmitters of credit have been kept alive through massive infusions of debt. Which would imply that these are quite overvalued. We should note that as an economy gets more complex, we would expect that transmitters of credit, like banks, would have to become more specialized, and limited in their scope to more efficiently target assets that are likely to survive long term and maintain their value. But in this present scheme the reverse is happening. With banks now becoming credit supermarkets which are themselves allowed to buy and sell assets directly thereby exposing the market to potentially acute inflation of true value.
In such a system the natural economy would correct for this by killing off the more inefficient assets as best as it could and thereby simplifying the economy overall. But this cannot be done if the Federal Reserve continues to print money and directing it to exactly those assets it perceives are in danger of failing and which would compromise its lending ability. Assets that perhaps should die off, are being kept artificially alive, thus exacerbating the potential for asset price collapse, and ultimate deflation.
So not only is the Fed artificially growing the economy with ever more potential for contraction due to inherent inefficiency, but it is also countering a very natural principle of asset depreciation as a direct consequence of increasing economic complexity by continuing to pump credit into these facilities. The end result is going to be a steep degeneration in natural complexity.
We should note that the present political disturbances which we see in the Mid East, Ukraine, Russia, Africa, Europe and Latin America in all probability stem from this direct principle. In essence the necessity for decelerating economic complexity is really the underlying principle behind the instability we are seeing manifest as global political destabilization. The true underlying causes may well be economic manifest as strategic power. Though those who are pursuing strategic aims may not realize, the fundamental causes are likely economic in nature.
The reality is that though the Federal Reserve actions may worsen even a limited steady state economy by creating inflation that ultimately acts as a potential for contraction, the impetus of the Global Economy now present is a separate force on the system. This drive to globalize the economy will only add complexity to an already inflated system, and the result will be a natural tendency towards asset depreciation worldwide. Central Banks modeled on the U.S. Federal Reserve will only make the situation worse still.
This instability will probably continue.
Foreign Fed Transactions
We are not here going to talk about foreign exchange problems or the interactions of the American system with others because it would get too complicated, but in reality these systems simply increase the pressure for inflation in the long run. Although we have heard about nothing but “the threat” of deflation, the truth is that all these systems which we see today are geared to creating nothing but inflation, and the only reason we ever saw price drops is because the natural economy was unable to accommodate the credit schemes put forward. This is precisely why these systems are doomed. Because any disinflation is going to lead directly to inflation by monetary response, which is the original objective of this system. But this inflation is going to be large and unsustainable, and place an incredible potential for contraction on any future economy. Foreign-global- interactions will only make it worse.
The solution to these problem is mind boggling and not something we can discuss fully here. But a few steps might be taken to slow down this system before the damage done becomes irreversible(although there is very good reason to think it already is irreversible.)
The Federal Reserve has so far been designated as a quasi private institution. This lets it be used by the government in ways that will always lead to corruption. The government can simply say its borrowing from the “private sector” or the “Free Market” but in reality it is actually borrowing from itself since it is the government itself that issues the money it supposedly borrows. This quasi private Federal Reserve must come to an end. And unless the government wants to give up its own currency, and its own ability to issue general credit(in which case it could turn the economy fully to the private sector) it will have to take the Federal Reserve under its full control and relinquish forever the Fed’s purported private “independence”.
There will be those who say this is dangerous or a socialist doctrine etc etc. But this is in reality the only option if the dollar is to be maintained. At present the Fed has too many loopholes and this leads to great possibility of corruption and misuse. By fully surrendering this economic organ to the control of the government, including the states, there will be cause for the representatives of the people to actually make serious laws considering the use of credit, virtual or asset based. Making the Fed fully public will allow a careful consideration by the people’s true representatives about just how to go about regulating the banking industry from the bottom up. It will also take away the endless amount of money that special interests have at their disposal, and who then use this money to control the representatives. Although we can see that our representatives have repeatedly raised the debt ceiling irresponsibly, this has probably been because the special interests have so much power over our representatives due to the nearly unlimited amount of credit available to them, and representatives do not have the full independence they require to represent their voters best interests. Yet that credit issued by the Fed is actually the American people’s money, and they should have a much stronger say as to how it is applied.
We should not forget that each time the money supply is expanded, the ordinary person pays for this in loss of wages, and loss of buying power. The dollar which the ordinary person works for , saves, and spends is systematically depreciated, and any outstanding balances at the Federal Reserve or Treasury are actually the American people’s ultimate responsibility. So it seems difficult to justify the Federal Reserve remaining a quasi private institution. The Federal Reserve should belong to the American people whose money is being used, and abused.
When this can happen is anyone’s guess. But at some point in the future something like this will have to take place. The assumption that private interests will serve the American people’s interest better than their elected representatives is quite flawed.
Asset Based Currency
However, this kind of change by itself will not really solve the underlying problems facing the Fed.
Briefly, we should say that the Bretton Woods agreement needs revisiting. Some say that a gold standard should be returned to, but in reality gold itself is a fiat currency of sorts. Why it is valuable exactly no one can really say, the use of gold is mostly cosmetic, so why are so many desirous of it exactly? Also, it is always possible to depreciate the dollar even if it is based on Gold. This was done a number of times while the dollar was still on the Gold Standard. So that in itself does not answer for depreciation of currency.
But in general an asset based credit system is probably required in order to temper the problems the Fed is prone to generate at present. The days of virtual credit probably need to come to an end if the economy is ever to really stabilize. And this is critical. We are slowly reaching limits of consumption. If indeed climate warming is a serious threat, then one of the ways we can combat this is by lowering our overall consumption for example. An economy need not expand everywhere and all the time. Under the present system it cannot do otherwise whether that’s healthy or not.
Monetary policy cannot alter the fundamentals of the natural economy. Things can be sped up, inflated and perhaps redistributed here or there, but the natural economy cannot be altered fundamentally in the long run by monetary policy, at least not alone by monetary policy. Nor can we assume that the only option is to consume endlessly without respite, as the present monetary system seems designed to require. An asset based currency will at least temper the Fed’s inflationary tendencies since any lending done will depend on the actual value of those assets acquired by the Central Bank. Conservation is part of any living process, so it must be with economic activity.
There are very definite limits to the natural economy, yet the present system seems not to be able to address these limits, or even remotely admit their existence. That’s a fatal flaw that needs to be addressed. Fail to address this issue, and human kind will suffer, till it gets it right.