What happened and what will happen


The dollar used to be backed by a hard asset, gold. That limited the printing of dollars and avoided the debasement of the currency.

But profits can be made through leverage — which requires the issuance of credit. The gold standard was a fetter on that, and so it was abandoned during the 1970s, enabling the massive financialization (the expansion of the paper economy: stocks, bonds, options, derivatives, other securities) that has been a hallmark of the last five decades.

The paper is supposed to represent real wealth, but some of it does not because too much credit has been issued. This would, as a rule, eventually lead to a period of debt deflation. When such threatened during the Great Recession the financial authorities printed money to valorize securities and debt instruments. This has created artificial prosperity, but also inflation.

That situation couldn’t go on forever and now there is a drama unfolding. The central banks seem to (finally) want to try to (gradually) let some of the inflated air out of the system in order to bring the value of the paper back in line with that of the economy’s real wealth. This represents a reversal of recent policies.

What will happen? Nobody knows.


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Steven Welzer

The editor of Green Horizon Magazine, Steve has been a movement activist for many years (he was an original co-editor of DSA’s “Ecosocialist Review”).