Topic: Monetary Policy
Calling All Wheelbarrows: Hyperinflation in America? (Part 2/2) "Let it not be said that No One Cared, that No One Objected, once it is realized that our Liberties and our Wealth are in Jeopardy." - Dr. Ron Paulby Jake, the Champion of the Constitution
(Libertarian)
Wednesday, July 16, 2008
Most readers of this article probably recognize that these are turbulent times in the America – whether it is a stock markets, supermarket, or gas station. You have no farther to look than the $5 T-as-in-TRILLION loss in Fannie Mae and Freddie Mac last week. You have no farther to look than the nosedives of the Dow and the S&P 500. Many may even recognize that the US Dollar Index (arguably the best indicator of the dollar’s purchasing power, a weighted index based on the Euro, Yen, Pound, Canadian Dollar, Swedish Krona, and Swiss Franc) is also at its all-time low. The index’s performance over 2001-2008 is quite shocking, as the purchasing power of the US Dollar has dropped 40% against this basket of currencies. The dollar hit a new all-time low against the Euro on July 15th. Gas higher than $4.50/gallon is now common, and food, despite the government figures, is getting expensive. <NYT announcement just in - CPI inflated by its highest in 17 years! +1.1% in June, that is a 13% annual inflation rate. Quote: "There is not enough lipstick for this pig.">> If you still have your job, your wages aren’t exactly keeping up, are they?
Yes, this inflation and loss of purchasing power is certainly horrible for those who own and earn the American dollar, that is, We the People. However, my question to you is not whether America is in bad straits inflation-and-purchasing power-wise but whether or not you objectively think that America is ultimately headed for hyperinflation, where hyperinflation is defined as higher than 10,000% inflation per year. Modern-day example – Zimbabwe, which cannot print money fast enough and, unbelievably, is now adding expiration dates onto their banknotes. This February, the inflation rate was well over 100,000%. This May, the hyperinflation hit 1,000,000%.
My question at first may seem ridiculous, that what happens today in an economically ruined country like Zimbabwe could happen to the World’s Largest Economy and its sole Military Superpower. But first please read below about the Hyperinflation Beast unleashed in post-WWI Germany, the infamous Weimar Republic. Although the dynamics in America are quite different – for instance Weimar Republic voter turnouts were typically over 80% for most elections -- as a freedom writer I must heed and warn of the final result – the Weimar Hyperinflation was one of the many prerequisites which enabled the violent Nazis to come to power.
"It was horrible! Horrible! Like lightning it struck. No one was prepared. You cannot imagine the rapidity with which the whole thing happened. The shelves in the grocery store were empty. You could buy nothing with your paper money."
– Dr. Friedrich Kessler, Harvard law professor who lived through the Weimar Hyperflation
Prior to WWI, Germany was Europe’s wealthiest, most powerful, and most advanced economy. Germany produced two-thirds of Europe’s steel, half of its coal, and more electricity than Britain, France, and Italy combined. Its population of 67 million dwarfed its neighbors’ with the exception of Russia. Cutting-edge advances in agriculture created a boom – for instance at the start of WWI, Germany was producing 1/3 of the world’s potatoes. Germany was the leader for most modern industries – its quality products from companies like Krupps, Thyssen, Siemens, Hoechst, and BASF were famous the world over.
To finance WW1, Germany borrowed money. In the midst of the war, the expenditures far exceeded revenue. The government began printing money without the backing of economic resources, but Germany wasn’t worried. They expected to payback the loans with the spoils of war, namely annexations of industrial area and tribute from the defeated. However, after their defeat, the national debt, forced Versailles reparations (in gold), loss of major industrial areas to France, shrunken domestic market, shift to peacetime economy, war veterans’ disabilities, political barriers to increasing taxation, etc. combined into a devil’s brew. What followed next wasn’t pretty.
Before the war in 1914, 4 marks = 1 American dollar.
After the war in 1919, 47 marks.
In 1921, 263 marks.
In July 1922, 493 marks. August, 1,000 marks. December, 7,000 marks.
In January 1923, 17,000 marks. July, 353,000 marks. Hyperinflation begins.
In August, 4,621,000 marks.
In September, 98,860,000 marks.
In October, 25,260,000,000 marks
In November, 2,193,600,000,000 marks
In December, 4,200,000,000,000 marks were required to buy a dollar.
Printing presses were unable to keep up with the need for banknotes of higher denominations. Stamps fell out of use as they couldn’t be printed in the right value fast enough; letters had to be mailed with a banknote stapled to the envelope. If a cup of coffee was ordered for 5,000 marks, the bill might be for 8,000 marks when the customer left the café.
Wages had to be massively inflated so people could survive. Employees collected their paypackets in shopping baskets or wheelbarrows, then immediately rushed to the shops to buy supplies before the plunge in the value of money put them out of reach. It was estimated 90% of a family’s pay went to food, which inflated madly. People on fixed income had to sell their belongings to eat. Starvation, food riots, massive strikes, looting, gunfights, hoarding followed. Sarcastically, I note the only good thing is that any fixed-rate mortgages were paid off pretty quick. Also keep in mind that although Germany was by far the worst, Austria, Hungary, Russia, and Poland all suffered hyperinflation as well.
How did it all end? Given the gravity of the problem, the solution was fairly easy. The German central bank (probably fatigued from printing away all that wealth and property from the people) issued a new currency, the Rentenmark, that was tied to the price of gold. As soon as it was circulated in high enough quantities, the hyperinflation ended.
Interestingly enough, right now there is another major case of gold being used to abate inflation. The Vietnamese Dong has been recently inflating at about 25%. (Although its not the sole reason, I can’t help but note the Vietnam’s central bank has a "hopping peg" policy to the dollar so it can be argued that is an example of the USA exporting some of its monetary pains to Asia – we take their goods, and send back inflation.) To combat inflation, Vietnamese private citizens have been importing gold madly to store their value in metal rather than paper currency that is devaluing. 60 tons were imported in January-May 2008, compared to 78 tons in all of 2007. Considered that global gold production/input is about 1500 tons, and consumption is 2000 tons, this is not an insignificant volume for a small country like Vietnam. However, in June the Vietnamese government tried to put a stop to this by suspending gold imports.
Well, back to topic, I was unable to locate the M3 increase rate (the increase in the overall money supply which correlates to inflation) increase in Weimar Republic, and since March 2006 the Federal Reserve has deigned to stop reporting this figure, the best bet right now is shadowstats.com, which estimates the true inflation of the US money supply, M3, at 16%, and true consumer inflation at 11%, which differs from the government estimate of 4%.
Translation: Unless you are getting pay raises at about 20%, this should send chills down your spine as in purchasing power terms you are getting poorer with every day that passes. Any savings you may have in American dollars are being devalued as well. Listen to Ron Paul talk about the "Strong" Dollar Policy and what his meeting with SecTreas Paulson and Fed Chairman Bernanke on July 11, 2008 was really all about. And here is the ShadowStats report on hyperinflation in America, its prediction that hyperinflation is likely, and the timing may be as soon as 2010. Here is food for thought on the world dumping the Dollar and the arrival of a "new, more equal world economic order."
Lastly, many reading this probably won’t do any research and will think Hyperinflation in America is simply impossible. Last year I would have agreed with you. That was when I stumbled on this website, Eric Englund’s hyperinflation.net and perused the work there. At the time, I thought his work was a bit extreme. Now, I am not so sure – for instance, in July 2007, he wrote here about the perils the American public and stockholders faced with Fannie Mae and correctly predicted its crash. So perhaps there is some truth there. If you read the above closely, surely there are some parallels between the Weimar Republic and the United States. Surely the "Strong" Dollar is not the right place to be, as I’ve already warned in previous articles below.
So, the question remains for you, Reader, I challenge you to reply. Long-term, is America headed for Hyperinflation or not?? Until decided, pardon me as I pass by you in the opposite direction a few times with my wheelbarrow. Getting a few loads stashed away before the herd stampedes may not be such a bad idea.
In Liberty,
Jake, the Champion of the Constitution
www.campaignforliberty.com
Author’s Note: The source data from the section on the Weimar Republic was paraphrased almost exclusively from pages 103-117 of The Coming of the Third Reich by Richard J. Evans, 2003. A fascinating read on this scholar’s examination of Hitler’s rise to power, no matter which shade of the political spectrum you sieg heil (Hail Victory) from.
We the People of the United States, in Order to form a more perfect Union, establish Justice, insure domestic Tranquility, provide for the common defence, promote the general Welfare, and secure the Blessings of Liberty to ourselves and our Posterity, do ordain and establish this Constitution for the United States of America.
As always, unlike the NFL, the author grants full permission to allow any accounts of, rebroadcasts, retransmissions, repostings in part or full of this article to your blog or anywhere else in order to promote the Restoration of our Republic.Veritas numquam perit. Veritas odit moras. Veritas vincit. Truth never perishes. Truth hates delay. Truth conquers.
Subjects of future articles…
1) The Federal Reserve System Must Be Abolished!! Per the Constitution, CONGRESS, not a Private Banking Company, should be in charge of the Dollar, the currency of We the People. Despite any rhetoric to the contrary, our Dollar is being treated like Dirt by Bernanke and his ilk.
"If I could wave a magic wand and the Federal Reserve Bank would disappear tomorrow, I would do so." – Bob Barr
2) The President’s Working Group on Financial Markets (aka Plunge Protection Team) must either Make its Meetings Open to the Public to the people or be Dissolved. There is no constitutional authority for a secret group to conduct centralized economic planning and daily market manipulations. I leave you with a quote (I did cherry-pick from two paragraphs) from that charlatan’s website, whitehouse.gov.
"The report is that financial markets are strong and solid… The economy of ours is on a solid foundation… Core inflation is low." – President Bush on the Plunge Protection Team’s annual report, January 2008
"Someday you gotta find another way, you better right your mind, and live by what you say Today is just another day unless you set your sights and try to find a way I say F*** Authority! Silent majority! Raised by the system! Now it's time to rise against them! We're sick of your Treason! Sick of your Lies! F*** no, we won't listen! We're gonna open your eyes! Frustration! Domination! Feel the rage of a New Generation! We're Living, We're Dying, and We're never gonna stop Trying!"
Preemptive War and Freedom Video Clips Published: May 16, 2008 Sick of war? A countdown collection of videos centering on the Bush Administration's unAmerican policy of Preemptive War followed by a collection videos centered on Freedom and Anti-War. Maybe you missed a clip or two. Are you Insane like Ron Paul, Jesse Ventura, Mike Gravel or are you unAmerican like Cheney, Clinton, McCain, and Obama?
We the People versus the Might of the US Government Published: March 2, 2008 What do the experiences of SAS trooper Ben Griffin, Hope Steffey, and Jose Padilla all have in common? They show the Might of Government is overwhelming Right. We the People want Justice!
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2008 Jake, the Champion of the Constitution, all rights reserved.
Published: Wednesday, July 16, 2008
Last modified: Monday, July 21, 2008
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If we use your definition of inflation - 10,000% per year, I think that's unlikely. Wikipedia's definition is a cumulative 100% over three years. [link edited for length]
That seems more plausible. But even that would be devastating for people on fixed income, or people whose wages don't keep up.
My guess is inflation of 10 -20% per year. Even that would be tough for people on fixed income.
at 16% annual, we're halfway there if you go by wikipedia's def...
i say; copper, aluminum, iron.
they're easier to buy than gold, easier to get, and simpler to consolidate. not as space efficient, but hey- beggars can't be choosers (and if things continue as such, we'll all be beggars).
interesting thought, although i confess i am wondering where you are keeping $9000 worth (2200 lbs I think) of copper
one item to keep in mind that the Fed and gov't have been backed into tighter corners than this before. there are some creative people there (creative because they have the power to create money), basically Reverse Robin Hoods in my view as all they do is rob the poor and give to the rich. they may be pissing in their pants right now, but i think - and i have no idea how - they can get out of this. delaying pain to their childrens day is the path congress has chosen for the past 20-30 years. However, the dollar will still go down, and SOMEDAY inflation/hyperinflation is going to burn what's rest of us. If I can help get the word out, thats a victory in itself
Jake- Thankyou for the exceptionally insightful article. I love to watch the operation of markets; there is mathematical beauty in the quotes you gave for the Weimar inflationary jump and I find a sort of perverse joy in how automatic market mechanisms which are just emergent properties of simple social psychology can outwit and evade the intention of (supposedly intelligent) central planners every time. Benoit Mandelbrot did his first significant work on fractals concerning market price moves in commodities more than 40 years ago-- basically he showed that they are chaotic systems at all levels of scale, which move in quantum jumps between ephemeral stability points, so that the notion of a stable price for _anything_ in the large view is nonsense. In my opinion the Weimar hyperinflation example is simply one of those jumps at the largest scaling view. Physical systems (such as CO2 levels in the atmosphere) seem to follow the same mathematics in spite of the obvious, that the time scale is vastly different and the underlying mechanisms have nothing in common. So observing these other chaotic systems can tell us something about markets (and hyperinflation is just an observable event of the market in fiat money) and vice versa.
As to hoarding copper, well current COMEX $3.735/lb; $9000 worth is 1095 kg, a little over a metric ton; works out to a volume of 4.336 ft^3; so a square 2ft x 2ft x 13 inches high. IMO not hard to store (or hide). I like Jason's idea. There do appear to be copper and aluminum linked ETF funds, but if you're worried about a failure of the global markets then nothing beats the cold hard metals themselves. I'd prefer those he mentions over gold or silver for apocalypse type conditions anyway: they have direct usage for subsistance industry while precious metals do not. The old adage claims that you can't eat gold, and I suppose it applies to copper, iron and aluminum too, but with ingenuity and knowledge you _can_ build farm equipment out of the latter and produce something to eat. That's not true of silver, gold, or palladium.
I've lived in a country (Brazil) where mild hyperinflation (according the Wikipedia definition-- I don't really agree with their definition) existed at the time. It's not really bad for most people- there just isn't much faith in the national currency and average people quickly cope by using other things as common currency-- other currencies, gold, gemstones, barter arrangements. So I don't fear the possibility of hyperinflation in the U.S. It could be a good thing if people are resourceful enough to switch to the underground economy and starve the central government of its income stream. If the trillions of dollars stolen from the people as tax "revenue" end up having Weimar-value, well then, HA HA HA! They'll have just the value they deserve to pursue their dreams of enslavement domestically and abroad-- ie. nothing. Market forces will have delivered unintended social justice once again.
One thing to keep in mind when speaking of hyperinflation in Zimbabwe, is their unemployment rate is at 50%. Right now, since I know you go by shadowstats.com statistics, the "real" unemployment rate is around 14%. I would think that this number would have to move higher in order for hyperinflation to occur.
I also think we are currently going through a deflationary scenario at the present time. Gold isn't breaking out. Oil I believe has had its run for now (of course a move into Iran can change this). The dollar is holding steady above 72. I'd like to see one more pullback in gold and then it's off to the races IMO (barring more bank runs like IndyMac).
JMHO, and like the work you do. I think we're all on the same page as far as the long term scenario.
Posted By: Jake, the champion of the constitution
Date: 2008-07-17 17:06:30
Dear Hiram - interesting comment, thanks!
Dear Doug - thanks for replying.
First, good point on the unemployment. While I profess that I have not read up on Zimbabwe hyperinflation, question - did the hyperinflation cause the unemployment or did the unemployment cause the inflation/hyperinflation? You see, Dr Evans wrote in his book "In the period up to the middle of 1922, economic growth rates in Germany were high, and unemployment low." He does not give a figure, but by my calculations of the work force/# employed it seems to be about 5%. Dr Evans goes on to write on several strikes that occurred in 1922 that exacerbated the situation "Without this background of virtually full employment, a general strike... would have been far more difficult to mount."
Second, gold and silver are being manipulated. I view this as a fact. There is a great video link in the Billionaires for Ron Paul article I wrote on the gold manipulation, but heres a report from GATA (Gold Anti-Trust Action committee) entitled "The Manipulation of the Gold Market"
http://gata.org/node/11
and "There are no markets anymore, just interventions" http://gata.org/node/6242
In terms of the dollar, its at its all time low vs the Euro, so I don't agree with "holding steady." More likely the Fed is intervening like crazy - with all the financial turmoil of the past week - ask yourself - DOES IT MAKE SENSE THAT THE DOLLAR SHOULD BE STEADY? Try "On the Precipice" by James Turk. http://www.goldmoney.com/en/commentary/2008-06-28.html I suppose we both at least agree that the dollar is in dire straits.
If you want to send me your email, I'll send you some Fed meeting minutes obtained by FOIA. My conclusion - they have been intervening like crazy for 20 years. This should not be a surprise.
Of course it is scary. But what makes you think that we are going to hyperinflation like in Germany in the 20s? What about in the 70s here in US? And I still hope that really there is indipendency between FED and US Government decisions. I mean they work together, but still thepresident can't really ask to print more money like it happens in Zimbawue.
First, the unemployment situation in Zimbabwe is listed in the CIA Worldfact book at 80%, not 50% as I mentioned. I've heard both, but went with the conservative estimate. Who trusts the CIA anyway right? lol
What causes the hyperinflation IMO, is when the country is not producing. The U.S., because of cheaper labor in other countries, has been exporting our production as you know. If I'm reading your synopsis of Dr. Evans right, it was the disruption of employment via strike that caused the problem right? This would be similar to what has happened in the U.S., but not to the extremes as Germany, at least not yet, ha. (this assumes I understand your point, which I may not).
For now, the U.S. has the 10th largest GDP per capita, so it is still producing something (other than for the military industrial complex, again, ha). Zimbabwe's GDP is in the single digit billions. They have nothing to produce but agriculture for the most part. How can a country with no production have it's own paper currency be anything but weak? Add debt to that situation and you have the current recipee for disaster.
As far as gold goes, I won't disagree to manipulation in some fashion. It's been beaten down for many years. Of course taxing it at 28% and calling it a collectible doesn't help eh? I've followed GATA. I'm also a contributor to Doug Gnazzo's forum at his site, HonestMoneyReport.com. We are mostly holdovers from the Richard Russell Forum days. Stop on by and contribute. We're all a bunch of friends. Some people agree with GATA, some don't.
As far as the dollar goes, when I say "holding steady," I'm talking about the dollar index where it is "holding steady" above 72. One has to realize that things don't go straight down, or straight up. This is true of every asset class. The dollar has been in a terrible slump since 2002. There's no denying this....but again, nothing goes straight down. I've been telling people for the entire year that we will muddle through in the stock market (I've been an investment adviser for 22 years) and the dollar and gold will trend until after the election (you can call this manipulation too as each time the stock market started to falter, who stepped in? Your buddies at the Fed, hehe).
So yes, I agree the Fed is intervening. With the last vote by the Federal Reserve Board leaving interest rates unchanged, it was a 9-1 vote. Robert Fisher was the lone dissenter and he was the only one that wanted to raise rates. I wrote him to comend him on his vote. He wrote back saying that "although we board members may disagree, we have every intention of doing our best." That's it. They all believe they are doing the right think, when you and I believe they have no clue. Amazing isn't it?
IMO: In my opinion JMHO: Just my humble opinion (I try to use those so as to not come off as authoritarian...as we are all after the same goals for the most part right?)
Posted By: Jake, the champion of the constitution
Date: 2008-07-18 22:26:39
Doug -
IMHO - we have the same goals.
On what causes hyperinflation, there is debate but IMO I think we are both right. - I think its increasing the money supply too quickly without any additional worth being the economy combined with loss of confidence in the currency. So a strike or unemployment would not add worth, so I think you are also right. I've sent this link to several economic professors from my university, it will be interesting to see if any of them are brave enough to chip in with their opinion. An interesting read on this is Wiki, wherein states "The main cause of hyperinflation is a massive and rapid increase in the amount of money, which is not supported by growth in the output of goods and services."
http://en.wikipedia.org/wiki/Hyperinflation
On the Dollar's "steadiness" IMVeryHO agree with James Turk (goldmoney.com link above) - I think its a 'dead-cat bounce,' and the Dollar 'died' for another 10-20% last Friday with the Fannie Mae/Freddie Mac decision. Nice thing about this, Doug, is we get to see who is right, just need to wait :)
Good comment on the Fed. For all my complaints, I do believe they are doing their "best" - although their "best" will naturally enrich themselves, which is their banks. We need to keep in mind that they have access to a lot more information than we do (like what the hell M3 is), and like a good overlord, they know what's best for you and I.
I don't think we've seen the end of the days of lynching. When people find out what these 'investment' bankers have done to the world financial system. In a conversation with a friend last night who more or less had an interesting 'strong dollar' view, we both realized we didnt know too much about financial derivatives. I've spent a few minutes looking around, and for a freedom writer whose mission statement quotes Tom Paine in a cavalier fashion, that no fear is allowed, let's just say my eyes are popped wide open.
That said, there are probably a lot of 'honest' traditional bankers too, like your buddy at the Fed. I hope these bankers are probably using Fannie, Freddie, and Indy Mac and probably a few other small banks failing with kids' nicknames we don't know about yet to assert control over the Bernanke faction. 9 to 1 eh? That's about how well RP did against the rest of the Republicans.
Thanks for chatting btw, I get a little lonely in the comment section of a lot of my antiwar articles.
Posted By: Jake, the champion of the constitution
Date: 2008-07-18 22:51:36
Andrea -
Don't be scared, learn more and make a decision for yourself. What makes me think America could repeat Weimar? Well look at all the parallels - preeminent economy based on technology with a fully employed and hardworking workforce, combined with 3 huge problems (see Part 1/2) massive historic and continuing Foreign Trade Deficits. An exponentially growing National Debt. A currency based on nothing physically tangible (see the What is Money link Part 4/6 link above). Very little private savings - since interest rates have been below inflation, Americans still choose to consume Today (or invest more-than-they-otherwise-would-have in the US stock market) instinctively knowing their money's purchasing power will be worth 4%, 5% whatever! LESS next year. So I guess a takeaway is that in a 'global' world why should you have all your assets in one currency anyways?? Investment companies always say to "Diversify your assets"
Actually my worries with hyperinflation could disappear tomorrow. Here's how: One of RP's bills actually can really take care of this hyperinflation worry, which is to introduce competitive currencies in the USA to the dollar in gold and silver -- let the people choose.
However, in terms of the US going into stagflation like the 1970s? My friend, I believe this has already begun. That's what all the economic indicators I follow indicate. American wages for the common worker are stagnant, or near stagnant, and inflation is over 10% (14% per shadowstats, 13% based on the extrapolated June 2008 CPI increase posted right after I wrote this article) Executive pay is a different matter, did you know for a major companies the average high-level executive pay is worth 510 'grunt' employees? this pales with the historic range of 10-20.
If you think the Fed is independent from the US government, particularly in an election year, I am sorry, but I have to say I think you are naive. Try taking a look at the link below - its from my favorite author at this site. You can also youtube or google Federal Reserve to find out more. The government really does just "print money" - of course the bankers have made it a bit more complicated for the layman to follow, but if you study it, "printing money" is what it comes down to -- for ALL of the world's government-issued currencies.
Unemployment does not contribute to or effect unemployment. Hyper-inflation occurs, sometimes extremely rapidly, when the monetary foundation of a country has been so diluted by monetary expansion that the money becomes literally worthless. There is an ancillary effect on monetary hyper-inflation and that is public confidence in the monetary system itself. The Framers of the Constitution were well aware of the dangers of fiat currency, the colonies, prior to Independence, experimented with the fiat monster with devastating consequences.
Since each and every single "dollar" in this country must be "borrowed" into existence, they are nothing more than "official bills of credit" used as units of exchange, but that doesn't make them money in the historical sense of the word. In the strictest sense, historically bills of credit were backed by real money, that, of course, is no longer the case.
The problem with building an entire monetary system on "fiat" money is that it completely consist of the creation and expansion of debt. Eventually, of course, the underlying debt that makes up the foundation of the economy, becomes so large, so demanding that the economy cannot sustain itself on the debt. In every fiat monetary system, the debt eventually multiplies exponentially and becomes irreversible.
Our government must continually "borrow" even to pay the underlying debt obligations, so to put this in perspective, the government must "borrow" new debt to pay down old debt, with an interest obligation on top of the debt, it is nothing more than a mathematically impossibility, a circular equation that cannot be solved. Since the entire system is subject to "interest" upon the foundational debt, it multiplies exponentially and can NEVER be paid off. The entire system itself does not allow for debt reduction because to do so will rapidly contract the economy proportionally to the amount of the debt reduced.
In other words, in an economy that relies upon credit expansion for growth instead of actual capital production and manufacturing, any reduction in the expansion of credit reduces the monetary supply in circulation, such a reduction contracts the economy. There is a predictable course of catastrophic failure in such systems, we have been seeing those signs for the last decade, but few seem to be paying attention, especially those blind leaders of the blind in Washington, DC.
By the way Jake and Doug, I give the current fiat monetary system a very few years before it reaches the terminal point in its lifespan. Between now and the next two to three years we will see a rapid decay in the monetary under-structure of the economy, finally reaching its plateau in insoluble debt.
Jake, I get many of my assumptions from the Federal Reserve itself, and its publications called "Two Faces of Debt", "The National Debt", "Modern Money Mechanics","Money, Credit and Velocity" and one of my favorites: "I Bet You Thought", there was also an article written by a former Fed Governor called "Taxes for Revenue are Obsolete".
In "I Bet You Thought" the Fed admits that their Federal Reserve Notes sitting in vaults do not become "money" until they are put into circulation in exchange for "checkbook money" that has been created by a loan. It goes on to state that as long as those printed Federal Reserve Notes sit in the vault with no debt behind them then they are not money, but are simply paper bearing an imprint. If all loans were paid off then there would not be one single Federal Reserve Note, or a single coin in circulation since each depends upon the underlying debt to keep them in circulation, thus keeping the economy growing. That debt is the sole foundation of fiat money and of our fiat economy. Every "dollar" is owed, not owned, by someone. At one time money was property, you exchanged your time and labor for real money, that is not the case with fiat money since it is nothing more than a legal notification of a debt obligation.
First, consider this fact, years ago the economy could maintain itself under considerable interest rate hikes, as the years pass, that tolerance has gradually, but noticeably been restricted. With each boom and bust, the ability of the economy to withstand such hikes has been narrowed between the lows and the highs. What was once considered a very reasonable rate in the economy is now reason for concern, and disrupts the economic boom period spinning it into "recession". This is a primary signal that the underlying monetary system is no longer able to fuel the overlying economy, that the underlying debt is siphoning off the productivity and thus the profitability of the economy.
The truth behind the fiat system is that all our money; every dollar is borrowed or “loaned” as debt into circulation. It is also subject to the demand of interest and it must be continually re-loaned or borrowed into circulation otherwise their will be a contraction of economic growth. The problem with such a system is, of course, that if the debt is paid against, both the principle and interest obligation, then the amount of the debt is only expanded, not actually paid down since the payment itself is borrowed and the periodic principle amount, along with the periodic interest is simply re-assumed and increased in order to maintain, and in most cases, expand the circulation since all economic growth in such systems totally relies upon the expansion of debt-money for growth. So, in such a system, because of its very nature, all payments made against the previous principle and interest obligation is re-borrowed as an equal sum to the previous principle with the addition of the interest obligation. The periodic interest that is attached to the periodic principle, reassumed, becomes all principle, but it then has another sum of interest added to it, thus the debt can never be paid down or off, after all, what would you pay a debt down with when all you can do is borrow or create debt to pay both the periodic principle and outstanding interest obligations upon that principle? I suppose the easiest way to put it is can you pay a debt with debt?
This has a tremendous affect on the way the economy functions and reacts to various pressures; since a real balance can never be fully attained in such an economy, it rapidly becomes impossible for such an economy to continue without eventual massive disruption. The economy suffers from an inherent flaw, and that flaw is the monetary system itself, composed of interest bearing debt creation, upon which it is completely stands. In such a system, an economic narrowing or constriction becomes inevitable because the underlying debt obligations escalate and demand more than the economy can produce while servicing the debt upon which it is created. There will be a period of ending debt, a terminal point that is determined by the amount of assumption, or re-borrowing of both the principle and the interest. This re-borrowed amount is considered new principle debt even though it is composed of and equal to the former principle debt and the amount of interest attached to that amount. Now, in order for there to be a payment, a portion must be siphoned off of the general circulation. Eventually there comes a time when the costs associated with servicing the underlying debt exceeds the circulation and at that point it becomes completely impossible for the debt to be serviced. In other words, instead of a technical bankruptcy, as the former Comptroller General David Walker stated about this country, we have a bankruptcy in fact and it expresses itself in economic collapse on a scale that few will be able to imagine and even less will be able to survive.
In conjunction with this fiscal fiasco, next year almost one third of the entire population will begin to retire and place an incredible demand on the future unfunded obligations made by this government to them. We are talking tens of trillions of dollars that will be an immediate demand, one that the government has absolutely no way of producing, it cannot print those unfunded obligations for to do so will simply contribute to the overall mess in which we now find ourselves. It cannot borrow from other countries because, as we will see, those countries will sink in concert with our own.
While I hope I am totally off base, I have a feeling we have a couple of years before the terminal point of the monetary system plays out.
By the way, the basic and original definition of Inflation was:"Undue expansion or increase of the currency of a country, especially by the issuing of paper money not redeemable in specie. A substantial rise of prices caused by an undue expansion in paper money or bank credit."
Hyper-Inflation is the point at which the monetary unit has been diluted by the over-expansion of the money supply until it no longer retains a real value base.
I would speculate that we, like Jake, might have the same conclusions, but differ on our timing or the "how we got there" aspect to fiat money.
You said, "Unemployment does not contribute to or effect hyperinflation. Hyper-inflation occurs, sometimes extremely rapidly, when the monetary foundation of a country has been so diluted by monetary expansion that the money becomes literally worthless."
Yes, it can occur rapidly. If GDP is not in place to keep the balance sheet in check, then "all of a sudden," things will go haywire.
A clear example of this is Argentina; They experienced poor or negative GDP growth with unemployment going from 6.1% in 1991 to 15% in 2000. Granted the increase in the money supply (the true definition of inflation as we both agree with) was the main contributing factor. I'm not denying that, just saying there is a cause and effect with unemployment and a nations GDP.
If it was just the money supply increasing, then why hasn't Japan experienced hyperinflation? They've been trying to print themselves out of their deflationary scenario for years to no avail. IMO, it's because they rank #3 in the world in GDP, just behind the U.S. They also rank #2 behind China in Reserves of foerign exchange and gold (the U.S. has 1/13th as much in reserves but ranks higher in GDP and lower in unemployment, and of course the U.S. has that military power thing going for them).
I think what the U.S. leaders finally realized is that if we can keep interest rates low, and devalue our currency by printing more money, then this will "hopefully" stimulate the economy. Well, it worked for awhile with the consumer side of things and now the corporate side is experiencing its downturn with the Fed ready at the rescue if any company falters. The U.S. citizen foots the bill by higher infaltion and eventually higher taxes.
Where we go from here, again, we probably aren't too far off in the eventual outcome. I do like to play devils advocate with people on this though. It's hard to refute the military power of the U.S. I don't see the U.S. faltering in "just a few years" as you suggest.
If the U.S. points a gun to a countries head and says take our dollars, then that country will take their dollars. For me, that seems to be what is happening with the advancement in Iraq, and now possibly Iran and eventually Venezuela. Remember, Iraq was going off the U.S. dollar and utilizing the Euro. Iran is currently trading oil in Euro's. This doesn't sit well with the elitist's eh? I don't think there is a limit to what they will do, especially the way they can twist people's minds via their corporate controlled media.
I really do appreciate the back and forth on this guys. It is impossible for me to have a crystal ball, but I do like to know what I may be missing and then process that into my mix of understanding the bigger picture as well as the unseen forces.
Your comments in the above post I agree with...about the "debt." I have fun with people in bars on this one.
I do think we differ on the timing, but I will give you this...ANYTHING can happen. A derivaitives meltdown by J.P. Morgan for example could easily do it. That's when I fear the warmonger's will step in, and that's why I keep a close eye on them now trying to predict their next move and blog about it before it happens.
I think we all have the goal of waking people up to the Federal Reserve and dollar farce.
Posted By: Jake, the champion of the constitution
Date: 2008-07-21 18:39:16
Doug -
On Japan, I am not educated enough to really converse a lot on it, but with their high amount of dollars in their reserves, the printing and low interest rates you alluded to, economic depression in some areas (Hokkaido, the northern island, I have visited there, lack of raw materials (ie commodities) I think they are little screwed too. however, its still possible that the yen will appreciate in purchasing power as an asian currency vs the dollar, and that might save them, but i really dont know
Republicae -
I have been trying to track "Modern money mechanics" from the Chicago fed with no luck for some time now. of late, i have been quite a fan - its amazing how open the fed is about everything they do, its like an open challenge "we are screwing your mama Lady Liberty, and what are YOU going to do about it?" is there a weblink or can you email it to me? if its an actual book I am a little screwed as I live abroad.
First Doug, I appreciate your comments. Concerning Japan, it is a very interesting economic model when speaking about a fiat economy. Japan has been able to maintain a base within its economy that differs greatly from our own. That base including a strong manufacturing, capital and savings base that all have contributed to counter-inflationary pressures. Additionally, in the 1980s, the so-called “Japan Miracle” seemed unbeatable, that, of course, changed by the 1990s. Japan had suffered from extremely high inflation during that period and prices are still well above what would be considered normal in a stable economy. However, something strange has happened in Japan due to the very nature of their monetary habits as a nation.
Due to space, I will condense the GDR, MS, CPI, AND PPI for the year 1991 as opposed to 2001. In 1991 the GDR was 5.7%, the MS was at 8.8%, the CPI was 3.3%, and the PPI was -2.1%, now comparing that to 2001 you will see a stark difference. In 2001 the GDR was -0.9%, the MS was 13.6%, the CPI was -0.7% and the PPI was -0.9%. As you can see the aggregate demand fell however, the MS rose which should present an inflationary pressure and indeed Japan did suffer from very high inflation. The government began to “stimulate” the economy back in the 80s, greatly intervening in the markets and the lose credit of that periods created one of the largest financial bubbles in history, it popped and the effects were a deflationary recession by the mid-90s.
If you remember, the Nikkei dropped more than 60% by 1992, from 40,000 to 15,000. Along with the Japanese Stock market, everything else began to collapse, between 1991 and 98, real estate prices fell by 80%. Unemployment rose to unheard of percentages in Japan, especially considering the Official and cultural stance on guaranteed, life-time employment, which has contributed to the entire problem.
If you look at the evidence of that period you can readily see that the Bank of Japan inflated the money supply, and continues to do so because in 1991 the Bank of Japan discount rate was at a hefty 6.0%, but by 1996 that rate had dropped to less than 1.0% and has remained at that level, or lower ever since.
The main cause for the deflationary pressures in Japan has been the result of what can easily be called “confiscatory deflation” by direct government intervention into the economy, this has been in contradiction to the expansion of the money supply in Japan.
Japan has suffered from deflationary growth, deflationary cash-building or savings and even deflationary bank credit. The main problem in Japan is the Bank of Japan itself and has done its best to inflate itself out of the problem it suffers from, that problem is an inflationary bubble it created during the 80s coming home to roost in the 90s with a bust that they have not recovered from. Japan also is still suffering from the remnants of the ideology of guaranteed jobs and low unemployment, these two things pose very serious issues in the Japanese economy, since such government intervention rejects free-market economic law.
Japan has had over 10 economic stimulus packages over the last few years and has flooded more than 100 Trillion Yen into the economy. Additionally, there are several things that is very strange about Japan, one is the “postal savings system” which is off-budget but funnels massive amounts of money into public and corporate projects, thus it rolls over the debts of unprofitable companies which only keeps that massive capital investment in the production of items and services that no one wants to buy, but it maintains a level of guaranteed employment and as such it serves as a social equalizer. Likewise, the government of Japan is notorious for supporting companies that are unviable in business…bailout is, after all, the name of the game. Japan has also been guilty of allowing very bad loans to remain on the books, supported by the ever-assisting hand of the government. This all amounts to nothing more than nationalization. There are therefore, several things about Japan that has contradicted the normal effects of fiat inflation and has caused just the opposite, a deflationary pressure. This is good for the common man, in a way, but not good for the over all economy in the long term. Eventually, deflationary pressures created through various government interventions will only serve to prevent recovery, especially since the Japanese government and Bank seem to be getting everything wrong. It has gone out of its way to prevent liquidation of companies and banks that should have failed, sound familiar?
Not to worry, this deflationary recession will not last forever, eventually Japan will suffer from an inflationary depression at the point that it can no longer sustain the massive costs of government intervention into its economy. Japan will eventually fall to the same fate as all fiat economies.
Thanks for the response. The following are just some thoughts off the top of my head as I'm pressed for time.
Re: Japan,
Republicae said, "It has gone out of its way to prevent liquidation of companies and banks that should have failed, sound familiar?"
100% agree, and a very well written synopsis.
The actions of the Fed will continue as they must "rescue" their buddies in the business. They cannot let the failures of these companies happen or else the domino effect would occur.
The fact that they enlisted the help of J.P. Morgan in the Bear Stearns bailout is living proof. The ties run deep eh? Also, Morgan was at risk because of the number of derivative dealings they had with Bear Stearns. In a sense, they bought back were handed back their own trades. When the public first got wind of the price they paid, hell was raised and it was adjusted upwards.
I don't put anything past the Fed and their intervention in the markets. Congress will succumb to any demands they make regarding regulation as well. That's like giving the keys to the drunk driver. IMO, it is a game and the game will conclude, I think we can all agree, in an ugly manner.
Then it's a matter of what will "they" utilize to replace it. I try not to speculate in public on that. We're not there yet, but you know it's been discussed by more than just conspiracy theorists.
Back to Japan...(at least the stock market aspect)...
Yes, their stock market was overvalued, and it came all the way down to under 10,000 at one point. Looking at P/E ratios, I believe one can see and expect this type of decline. Both Japan and the U.S. today are still overvalued IMO. Stocks aren't paying dividends like they used to and the overall risk involved in holding equities, especially today, is becoming greater and greater.
We are seeing all world stock indicies now declining, along with housing. This is deflationary. At the same time, we are seeing currencies declining and this is causing food prices etc. to move higher, and this is inflationary (although oil is currently falling some). There are some supply and demand issues as well.
What happens next? Again, I think we are both in agreement on the end result, but differ on the timing. The Fed is still relevant and I think we will trend in the market and in gold until after the election. It won't matter who gets elected as both parties are now leaning left.
Nationalization of banks or other industries (airline?) is a definite possibility. It won't do a damn bit of good. Sooner or later, the walls will come tumbling down. Then we can look to the Argentina example of what would probably happen next...barring any extreme government moves or motives.
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