The abuse of seignorage.

Seignorage is the right of those in power to make a means of exchange. In olden times this meant the minting of coins. Kings and other rulers made a small profit on doing this. Most of the coins minted were made of gold, silver or platinum and copper. But, it was inconvenient and dangerous to carry large sums of money, so paper derivatives came into use. Paper derivatives represented sums of coin, deposited at some bank.

Seignorage changed when countries began to use the derivatives as money itself. Whereas kings had to mine silver and gold to mint coins(this fact acting to restrain the abuse of seignorage), paper is very cheap, so paper money could be printed cheaply and in large quantities.

The abuse of seignorage grew with the invention of creating money digitally then creating other derivatives. Modern derivatives seldom represent value of real things, they are in fact betting slips. Stock options are derivatives of stocks, the right to own a sale or a buy of a particular stock for a stated time. Options are paper assets. There are many other derivatives: contracts to own mortgages, betting slips on interest rates, currency, bond rates. These are all paper assets. It is estimated that the sum total of derivatives exceed the value of the underlying factors by ten. Thus, the contracts to buy silver or gold is ten times the amount of the metals that are actually sold and bought.

Kings abused seignorage by reducing the metal content of coins. The modern abuse of seignorage is far more prevalent and far more dangerous. The treatment of paper assets allows the makers of tradable derivatives to add to the money supply. This in fact is an abuse of seinorage. A far more prevalent abuse of seinorage is the printing (or digitizing) of paper money to cover deficit spending. Politicians provide "free" services to constituents and pay for it by printing money. Governments following inefficient economic models cover their sins by printing more money.

The whole world is awash in paper money and derivatives. It is a colossal abuse of seignorage. It will end with the destruction of paper currencies. How soon? Hard to tell. But, the failure of paper currencies will happen almost overnight as derivatives assume their true value: the value of the paper they are printed on.

We begin to see signs of this coming. Remember the "trade" one of our banks made on derivatives? It is said to have resulted in a loss of maybe $2B. Then the loss grew to $4B and now there are hints that the loss might be as large as $100B. Allegedly, the loss has to do with trades on derivatives of interest rates. But, interest rates aren't changing much. I can think of only one area where such losses could occur: selling contracts on gold and silver. Beginning last September, gold and silver prices went down as an avalanche of sale contracts flooded the market. Did the bank deal with options to deliver? I think so. And now, with gold and silver prices having risen,  the liability is rising too.