At this unique moment in the history of mankind, understanding the inescapable consequences behind these sixteen words is more important to your financial future than you understanding all of the economic textbooks ever written. These sixteen words are also the most secretative, never written, never publicly spoken knowledge of central bankers. These words explain the current extreme desperation of the Fed and other central bankers.
These sixteen words are Atocha's Supreme Law of Purchasing Power. Another way to state the same Law is: 'Economic expansion gained by debt creation is always equaled by economic contraction caused by debt liquidation'.
"An increase in purchasing power is approximately proportionate to the net amount of debt increase; until the compounding of interest payments, defaults, and depreciating existing debts, cause purchasing power to crest and decline because the amount of debt has reached a point of collective debt saturation". The same Law, stated another way: 'Economic expansion is approximately proportionate to net debt expansion until the compounding of interest payments, debt defaults, and depreciating existing debts, cause the economy to crest and decline because the amount of debt has reached a point of collective debt saturation '. At the point of collective debt saturation; the creation of more debt fails to create more purchasing power. It then becomes rather like trying to pour more water into a glass of water that is already full and overflowing; because, every segment of society is already maxed out with more debt than they can repay. If this is where we are now; all of the Fed interest rate cuts will never create economic recovery without the long painful process of massive debt liquidation.
Our second corollary Law on purchasing power is: "The decrease in purchasing power is approximately proportionate to the net amount of debt being liquidated". Stated another way: 'The total amount of economic contraction will be approximately proportionate to the net total amount of debt being liquidated'. Stated still another way: 'The decline in the general standard of living will be approximately proportionate to the net total amount of debt being liquidated'.
How is purchasing power borrowed? Purchasing power is temporarily borrowed from the future by debt. Everyone who has ever used a credit card should understand this simple reality.
In order to understand what happens to purchasing power, step by step, within a framework of debt; lets dissect purchasing power within bond creation and within all possible means of bond liquidation. This analysis will provide us with the proof of the theorem that is Atocha's Supreme Law of Purchasing Power. What is true for bonds as debt is in net process true for other forms of debt.
Bonds may be created and issued by public utilities, railroads, other private corporations; municipal, county, or state governments; or by the central government, or, by quasi-government agencies. Bonds are but one kind of debt instrument. However, we shall use one specific example bond in order to deduce from all possible consequences the truthfulness of the theorem of Atocha's Supreme Law of Purchasing Power. We shall observe what happens to both currency units and purchasing power, under all possible circumstances of bond liquidation.
ABC Inc. is a hypothetical corporation that has a considerable amount of assets, but zero cash dollars. So, ABC Inc. creates and issues a twenty year bond for a total of one hundred thousand dollars, with the bond paying current interest rates. Our hypothetical corporation, ABC Inc., is the BOND SELLER. They sell the bond in exchange for one hundred thousand dollars in currency.
IMMEDIATELY AFTER ISSUE THE BOND CREATOR AND SELLER HAS GAINED:
1) One hundred thousand dollar units in legal tender currency.
2) The current purchasing power of one hundred thousand dollar units.
Winston Smith pays one hundred thousand dollars in currency for the bond. Winston Smith is the BOND BUYER. Winston Smith now has the bond, which is one hundred thousand dollar units, in non legal tender form. However, Winston Smith still has the purchasing power of one hundred thousand dollar units, as long as the bond is liquid and stable in value. Immediately after purchase, Winston Smith neither gained nor lost dollar units or purchasing power.
IMMEDIATELY AFTER PURCHASE, THE BOND BUYER STILL HAS:
1) One hundred thousand dollar units (convertible on demand to legal tender dollar units).
2) The current purchasing power of one hundred thousand dollar units (the bond).
The BOND BUYER came out even. Winston Smith started and ended the bond purchase transaction with one hundred thousand dollar units and the current purchasing power of one hundred thousand dollar units. Winston Smith had no loss and no gain.
Even though the BOND BUYER had no loss and no gain, the BOND SELLER has gained one hundred thousand dollar units and the current purchasing power of one hundred thousand dollar units. The purchasing power of one hundred thousand dollars has been TEMPORARILY expanded into the purchasing power of two hundred thousand dollars. In effect, both parties can simultaneously use the purchasing power of the same one hundred thousand dollars.
The issue of the bond creates a 'double double'. An elastic one hundred thousand dollar units has been expanded and doubled to two hundred thousand dollar units. Also, outstanding purchasing power, in current dollar units, has been expanded and essentially doubled by the issue of the same bond.
ATOCHA'S FIRST BOND LAW: At the time of issue, dollar bonds create dollar units.
ATOCHA'S SECOND BOND LAW: At issue time, every single dollar bond doubles the number of existing dollar units in its face value.
ATOCHA'S THIRD BOND LAW: At issue time, every single dollar denominated bond approximately doubles the amount of purchasing power that is in its face value.
The same 'double double' happens with other forms of debt. Bank consumer and mortgage loans are funded by bank customer deposits, including funds in demand deposits in checking and savings. I personally checked with two banks; and, except for a small reserve, the dollars in your checking and savings accounts are also simultaneously dollars in home mortgages and consumer loans. Bank demand deposits in checking and saving accounts fund the banks loans to its customers. If bank demand deposits become insufficient to cover bank customer loans, the bank borrows the needed balance from the Fed. With the issue of these debts (mortgage and consumer loans); both dollar units and purchasing power are temporarily essentially doubled (less the small reserve requirement). The same dollars and purchasing power that are in your checking account are also in someone else's home mortgage or consumer loan.
The economic prosperity of a debt expansion is illusionary. That economic prosperity is based on the banking illusion that two or more people can each totally own and spend on demand, the very same dollars and the very same purchasing power at the very same time. Some of the dollars that you have available to spend in your bank checking account; another bank customer also has those same dollars ready to spend because of a bank consumer loan. By the accounting illusionary trickery of our banking system; you can both simultaneously spend the same dollars and your collective purchasing power is essentially doubled, but only temporarily. The general economy functions with a highly elevated false prosperity and a highly elevated false standard of living, as if the illusion is reality. In due course, society reaches a point of collective debt saturation- the compound interest of ever increasing debt creates a widespread inability to pay; and, the banker's illusion collapses in a massive debt liquidation and its corresponding massive collapse in purchasing power and an extreme collapse in the general standard of living.
Lets return to our original bond example. What happens when bonds are paid off? Again, let's follow our same bond. It is twenty years later and we have reached the expiration date of the bond. For illustration purposes let's assume that our hypothetical corporation, ABC Inc., has made profits and now has 500,000 dollars in currency. And for the sake of clarity let's also assume that Winston Smith never sold the bond. And, for this redemption example, we will assume constant dollars.
Due to the potential offsetting of interest earned/interest paid, we shall ignore interest payments paid over the past twenty years. (The BOND SELLER could have held on to the one hundred thousand dollars in currency received from the BOND BUYER and earned close to offsetting interest if so desired.)
At redemption, the original bond seller, our hypothetical corporation, ABC Inc., pays off and redeems the matured bond. They pay off the bond with one hundred thousand dollars of currency, which they give to Winston Smith in exchange for the bond. With the bond redemption, ABC Inc. goes from 500,000 dollars in currency to 400,000 dollars in currency.
THE ORIGINAL BOND SELLER, ABC INC., LOSES AT REDEMPTION:
1) One hundred thousand dollar units.
2) The purchasing power of one hundred thousand dollar units.
At redemption, Winston Smith, the BOND BUYER, gives up the one hundred thousand dollar bond and receives one hundred thousand dollars in currency. In terms of principal, Winston Smith, the bond buyer, comes out even in dollar units and purchasing power when the bond is paid off with constant dollars. Winston Smith has no gain or loss from the bond being redeemed or liquidated. (For this redemption example we assumed constant dollars.)
AFTER REDEMPTION THE ORIGINAL BOND BUYER STILL HAS:
1) One hundred thousand dollar units.
2) The purchasing power of one hundred thousand dollar units (at the time of issue).
With constant dollars, the original bond buyer, Winston Smith, came out even (in both dollar units and purchasing power) in both the issuing and the redemption of the bond.
The bond during its lifetime TEMPORARILY increased society's supply of dollar units. Also, during its life-time the bond TEMPORARILY increased the amount of purchasing power in society by the banker's accounting illusion of the very same purchasing power being in two entirely different places at the same time.
With constant dollars, in terms of principal, the original bond seller, ABC Inc., came out even in the end. All of the dollar units and purchasing power that were gained in the issuing of the bond were lost in redeeming the bond.
ATOCHA'S FOURTH BOND LAW: At the time of redemption, dollar bonds destroy dollar units.
ATOCHA'S FIFTH BOND LAW: At redemption time, every single dollar bond contracts the number of dollar units in circulation by its face amount.
ATOCHA'S SIXTH BOND LAW: With constant dollars, every dollar bond redemption contracts the amount of purchasing power outstanding by the amount in its face value.
Every dollar bond issue increases society's supply of dollar units. And every dollar bond redemption decreases society's supply of dollar units.
As a result, any figures on dollar creation and dollar supply have to include the face value of every single dollar bond outstanding. This is the first crucial thing that bonds impact. Their issue and redemption expands and contracts the general dollar supply by their face amounts.
A net issue of dollar bonds (and other dollar debts) has the net effect of increasing the general supply of dollar units. A net redemption (or liquidation) of dollar bonds (and other dollar debts) has the net effect of reducing the general supply of dollar units.
When our hypothetical corporation, ABC Inc., redeemed the bond and paid it off, they lost purchasing power. Yet, Winston Smith gained no purchasing power by the redemption of the bond.
Prior to reaching a point of collective debt saturation, every new bond increases purchasing power; and, every bond redemption, (or liquidation), decreases purchasing power. This elastic expansion and contraction of purchasing power coincident with bond issue and bond liquidation is the second crucial thing that bonds impact.
Of course, not all bonds are liquidated by the original bond seller paying them off in constant dollars. Can bonds (and other debts) be liquidated in some other manner in order to avoid the collapse in purchasing power at the time of liquidation? Let's find out.
Let's return to our original example of a single bond issued and sold by our hypothetical ABC Inc.; and, bought by Winston Smith. This time, let's assume hyperinflation during bond maturation. Let's assume that twenty years later ABC Inc. pays off the bond with totally depreciated and worthless dollars.
With hyperinflation, ABC Inc. buys the bond back for one hundred thousand dollars in totally depreciated and worthless currency. ABC Inc. neither gains nor loses any purchasing power at the moment of redemption.
WITH HYPERINFLATIONARY DOLLARS ; AT REDEMPTION THE ORIGINAL BOND SELLER HAS:
1) Lost one hundred thousand dollar units in currency.
2) Lost no purchasing power as the dollar is totally depreciated and worthless.
The bond seller, ABC Inc., gained purchasing power when the bond was issued; and, avoided losing purchasing power when the bond was redeemed twenty years later. In hyperinflation, in terms of principal, the bond seller gains purchasing power at the moment of bond issue and never loses it at redemption.
For Winston Smith, the bond buyer, hyperinflation is a different story. With the bond redemption for one hundred thousand dollars in worthless currency, Winston Smith has lost the purchasing power that one hundred thousand dollars had twenty years ago. So, bond liquidation by hyperinflation still causes a collapse in purchasing power.
ATOCHA'S SEVENTH BOND LAW: Bonds liquidated completely by currency inflation, with totally worthless currency units repaying principal, still create a collapse in the purchasing power of the principal.
The only difference is that in hyperinflation the loser of purchasing power during the bond liquidation is Winston Smith, instead of ABC Inc.. Winston Smith loses all of the purchasing power of his principal, that ABC Inc. gained at time of issue. With currency inflation, bonds become just another aspect of the theft function of a fiat currency.
ATOCHA'S EIGHTH BOND LAW: When bonds are liquidated solely by currency inflation; it is the bond buyer, instead of the bond seller, that loses all of the purchasing power of the bond principal with liquidation.
Let's again return to our original example of a single bond issued and sold by our hypothetical ABC Inc. and bought by Winston Smith. This time let's assume that our example bond is paid off in depreciated dollars that have lost half of their purchasing power in the twenty year life of the bond. In this example, both ABC Inc. and Winston Smith lose equal portions of the purchasing power of the principal with the bond redemption. Combined, they lose all of the purchasing power of the principal that was gained by ABC Inc. when the bond was issued.
Let's return to our original example of a single bond issued and sold by our hypothetical ABC Inc.; and, bought by Winston Smith. Let's assume that nineteen years later ABC Inc. goes bankrupt and completely defaults on repayment of bond principal.
WITH BOND LIQUIDATION BY DEFAULT, THE NET EFFECT OF THE BOND PRINCIPAL ON THE ORIGINAL BOND SELLER HAS BEEN:
1) A gain of one hundred thousand dollars in currency.
2) A gain of the purchasing power of one hundred thousand dollars at the time of issue.
The bond seller, ABC Inc., gained purchasing power when the bond was issued; and, avoided losing the purchasing power of the original principal when the bond was defaulted nineteen years later. In bond default, the bond seller gains purchasing power at the moment of bond issue and never loses that purchasing power of the original principal, because of the bond liquidation by default.
For Winston Smith, the bond buyer, default on bond principal is a different story. With the default of the bond, Winston Smith has lost all of the purchasing power of his principal, that one hundred thousand dollars had nineteen years ago. So, bond liquidation by default still causes a collapse in purchasing power.
ATOCHA'S NINTH BOND LAW: Bonds liquidated by default on repayment of bond principal, still cause a collapse in purchasing power.
With bond liquidation by default on repayment of bond principal, Winston Smith loses all of the purchasing power of the principal that ABC Inc. gained at the time of issue.
ATOCHA'S TENTH BOND LAW: When bonds are liquidated by default on repayment of bond principal; it is the bond buyer, instead of the bond seller, that loses the purchasing power of the principal with liquidation.
Using a bond as our debt instrument, we have examined the purchasing power consequences of every type of bond liquidation. We have analyzed the effect on purchasing power during: 1) Bond liquidation by repayment with constant dollars, 2) Bond liquidation with hyperinflationary dollars, 3) Bond liquidation with fifty cent dollars, and 4) Bond liquidation by default on repayment of bond principal.
In every possible type of bond debt liquidation, Atocha's Supreme Law of Purchasing Power proved true. "Purchasing power gained (in the bond principal) by debt creation is always equaled by purchasing power lost by debt liquidation."
Thus, we know with absolute certainty, that all of the purchasing power gained from outstanding debt creation world-wide since the Great Depression of the 1930's will be lost. Never in the history of mankind have so many people borrowed so much purchasing power, over such a long period of time. Due to the biggest expansion of debt in the history of mankind, we now must face the most massive decline in purchasing power, and standard of living and economic activity, that the world has ever experienced due to debt creation and debt liquidation.
That absolute knowledge explains the current desperation of the Fed and central bankers. That consequence, (Atocha's Supreme Law of Purchasing Power), that world-wide extreme collapse of purchasing power, economic activity, and standard of living; is why those secret sixteen words are at this historically unique moment in the history of mankind, more important to your financial future than your understanding all of the economic textbooks ever written.
It is fear of triggering a massive, uncontrollable avalanche of debt liquidation that causes central bankers to be most secretative; and, to never publicly write or speak the proven and undeniable truth that: "Purchasing Power gained by debt creation is always equaled by purchasing power lost by debt liquidation."
Bonds can be liquidated by repayment in constant dollars, depreciated dollars, or worthless dollars. Bonds can be liquidated by default. The method of bond liquidation makes no difference in the net dynamics of purchasing power. The full original purchasing power of the principal gained with the issue of the bond is always lost with the liquidation of the bond; by either the buyer, seller or both.
No matter how bonds are liquidated, a loss of the purchasing power of the original principal always accompanies their liquidation. This is the third crucial thing to understand about bonds. Bonds have temporary lives; and, so does the purchasing power of their principal.
ATOCHA'S ELEVENTH BOND LAW: With bonds, (and all other debt), the purchasing power of the principal borrowed, always equals purchasing power collectively repaid by either the buyer, seller, or both.
Depreciation or hyperinflation of the currency is to no avail. Default is to no avail. There is no way to spend the future and not pay it back. Purchasing power borrowed by the principal of debt, always becomes purchasing power repaid by one or more parties losing an equivalent amount of purchasing power.
Purchasing power borrowed from the future is always purchasing power repaid collectively by the debt participants in the future. If the purchasing power of the principal is not repaid by the borrower, it is repaid by the lender, or by both combined. Purchasing power gained by debt principal is always purchasing power lost by debt liquidation.
We postulated a theorem, Atocha's Supreme Law of Purchasing Power: "Purchasing Power Gained by Debt Creation is Always Equaled by Purchasing Power Lost by Debt Liquidation". We tested the truthfulness of our theorem by analyzing purchasing power during every possible type of bond debt liquidation. In every possible instance, our theorem held true; and, thus our theorem was proofed as true.
Those bankers and their Wall Street surrogates who, for self-serving political and financial interests, want to continue to keep Atocha's Supreme Law of Purchasing Power secret, can be expected to attack this proof with side issues (such as the power to print currency makes a difference- covered by the fifty cent dollar example and by the hyperinflationary example); and, with great complexity (such as the potential offsetting of interest) in order to create confusion and doubt. If that happens, I will consider it a compliment.
You may ignore the contents of diversionary attacks by side issues; and, attacks by creating confusion and doubt by great complexity. The same simple debt process that happened every time that you used your credit card is also the very same debt process that applies to corporations and governments.
ATOCHA'S TWELTH DEBT LAW: The dynamics of debt and purchasing power do not differ, based on the identity of the debtor.
Such an irrational notion that debt and purchasing power processes would differ, based on the identity of the debtor, is so irrational as to be intellectually psychotic. What holds true for you borrowing purchasing power from the future with credit card debt; also holds true for corporations and governments borrowing purchasing power from the future with debt.. If you do not repay your credit card debt with a future loss of your purchasing power, the credit card company then loses the purchasing power that you spent. It is that simple. That very simple reality of debt and purchasing power is also true even if the debtor is a corporation or government. Who the debtor is, does NOT alter the dynamics of purchasing power for debt creation and debt liquidation. So, I urge you the reader, to resist and reject banker's arguments and attacks on Atocha's Supreme Law of Purchasing Power, based on banker intellectual schizophrenia. Please, never forget the universality of the debt and purchasing power dynamics of a simple credit card purchase.
DISCLAIMER: This article is provided for intellectual stimulation only. The contents are not intended as investment advice. Also, I am not not trying to sell you the reader anything. I do greatly appreciate and enjoy email feedback. I sincerely regret that I find myself unable to answer each and every email.
Atocha (Frank Smith) Copyright l983 and 2002, Frank Smith fhsmith@terranova.net
January 12, 2002