Topic: Economics
An Anti-Ron Paul Deflationary Economic Theory Can you prove me wrong? A simple idea about how the bailout could lead to a deflationary, rather than inflationary environment, proving Ron Paul dead wrong.by Jake Towne, the Champion of the Constitution
(libertarian)
Tuesday, October 21, 2008
Here is an alternative theory on the recent bailout that I have been questioning myself with recently. I want to share it to see what feedback you might have against it to prove me wrong.
Okay here goes....
1) Government gives massive Bail Out to banks, investment banks and insurance companies, creating money, which would technically lead to inflation.
2) But the banks, etc don't use the money, they just hold on to it. No Friedman "trickle-down" economics here!
3) Therefore economy suffers, the stock markets crash (probably globally), there are plenty of job losses, and decreased income for American taxpayers, probably leading to socialization which kills innovation and makes more people dependent on the state.
4) The American taxpayer-worker gets whacked with having to pay off their debts on homes, cars, etc.
5) Foreclosures and home equity losses continue to accelerate, driving prices further and further down.
6) Meanwhile McBama cranks up taxes, whether corporate or personal to pay the Bailout and national debt, further draining Americans of dollars.
Here is the kicker -
7) However, since all the dollars have been sucked into the bad derivative-ridden balance sheets of the banks, there are less dollars in circulation competing for goods, so DEFLATION results. The price of gold, oil, bread, etc crash but fewer and fewer people can afford them.
8) The banker and insurance companies wait for a bit, and then come out and BUY everything, especially hard assets. They end up even wealthier than before. Countries with large USD reserves (Japan, China, Saudi Arabia) get in on the action and buy up America as well.
What I am still pondering about what all the other global fiat currencies/economies would do in this scenario.
This would also explain why the Establishment found the passing of the Paulson Plan to be so critical. Although they could have just done the same thing by using the Fed outside of Congress, the Establishment had to knock a thought into our skulls that perhaps We the People actually sanctioned this Paulson Plan.
I just can't figure out how Congress thinks they are actually representing us. Overall, they are either complete economic misfits (quite possible), incredibly malevolent, or a hybrid mix.
Anyone care to disprove my theory? That'd be nice! I still hold my opposing view that we're looking at Weimar hyperinflation, and buy physical gold and silver (especially right now) but it's always best to question yourself. I'll defend my thinking if this article actually gets some responses. And yes, I know, either way hyperinflationary or deflationary, its a bit depressing. I plan for my next article to be about a real American hero - from Guantanamo, no less!
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.
"Why did Father give these humans free will? Now they're all confused!"
- Tool, "Right in Two." Very fitting lyrics in this song if I happen to be correct.
Police State Stomps on Iraq Veteran's Face as McBama Sanctions Attack on Freedom of Speech: The Story of the Hempstead 15 (Part 1/2) Published: October 25, 2008 What? Yet another event the media completely missed? After multiple attempts to engage McBama to answer their questions, the Iraq Veterans Against the War (IVAW) led a peaceful march on the last McCain-Obama Presidential Debate and were met with 30 mounted police and a horde of others in riot gear. The mounted police stamped on an Iraq war veteran's face and attacked the crowd. Ron Paul supporter and veteran Adam Kokesh was arrested as well.
The views expressed in this
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It doesn't matter if the banks "hold on to " the newly printed fiat bailout dollars. Once it is printed, it exists. Therefore the value of the dollar WILL decline, inflation WILL occur.
Posted By: Jake, the champion of the constitution
Date: 2008-10-21 16:59:47
Dear Justin -
Good point. Counterpoint is what if the banks just hold on? You are right but what if that money takes 10 years to make it to the people?
"If the American people ever allow private banks to control the issue of their money, first by inflation and then by deflation, the banks and corporations that will grow up around [the banks], will deprive the people of their property until their children will wake up homeless on the continent their fathers conquered."
Things will be deflationary for a time but the wave of FREE MONEY TO ALL MY FRIENDS will shift to inflation thereafter.
It is a question of value.
If you think that the government is going to make thier debt more valuable through long term deflation you are sorely mistaken. They will over come this deflationary turn and more with a hyperinflationary period. Unless All confidence is lost in the dollar before that. Could happen, we are dangerously close.
Some other interesting reading:
The true reason banks wont lend to each other - Shadow Banking Defined
Between 1250 and 1350, Venetian financiers built up a worldwide financial speculation in currencies and gold and silver bullion, similar to the huge speculative cancer of “derivatives contracts” today. This ultimately dwarfed and controlled the speculation in debt, commodities, and trade of the Bardi, Peruzzi, et al. It took all control of coinage and currency from the monarchs of the time.
The banks of Venice were deceptively smaller and less conspicuous than the Florentine banks, but in fact had much greater resources for speculation at their disposal. The Venetian financial oligarchy as a whole, which ruled a maritime empire through small executive committees under the guise of a republic, centralized and supported its own speculative activities as a whole.
The influx of new dollars into the eonomy will make every dollar worth less. It also raises our future tax burden to the government. We have already had plenty of fed driven inflation since the end of ww2. If deflation occurs, prices go down for many goods, but it isn;t because of increased supply of a good, but because of decreased demand. Its already happening with oil. I dont see any more inflation coming because the fed/treasury combo has already become a defacto taxpayer backed national bank. If this plan doesn't work, we have a depression, if it does work we have a severe recession followed up by another inflationary period. Eventually the system will fail like a christmas tree with too many ornaments.
I agree that the Fed's money has gone towards shoring up reserve requirements decimated by leverage gone bad. So far,apparently, just keeping up with what is destroyed. Except for the national debt (ugh) , seems to be a zero sum game. so far. I just don't see how the "derivatives" won't bring down the big boys unless the whole fricken' world is willing to "mark to fantasy". Since the derivatives market is huge and worldwide that just might be the outcome. No matter what, there will certainly be money creation going on.
I think this article is incorrectly titled, becasue the inflation Ron Paul is talking about is inflation in the sense of an increase to the money supply and government credit. (see Austrian school defintion) This is different than inflation with regards to general prices. When you are speaking of deflation , you are using the term in the general sense, meaining a reduction in prices. Deflation the way Austrian school uses the term is an decrease in the money supply. What we have here is the feds inflation of the money supply in 2000-2007 causing the current downturn in the economy and a possible reduction in prices because of decreased demand due to decreased economic activity.
Posted By: Jahfre Fire Eater
Date: 2008-10-21 19:50:31
As long as the Fed, the US Treasury and the corrupt congress (except Ron Paul) can print dollars deflation is simply not a possibility.
If the scenario you described played out, the national debt would be paid for each year in currency that is worth MORE than it was the year before. In a time of decreased consumption and productivity a larger % of GDP would be dumped into servicing our debt.
As long as we have chosen death by debt, the US will stare straight into our creditor's eyes and devalue the currency relentlessly until it is paid off or until it is repudiated. Deflation is an impossibility.
I understand your argument Jake and at first I was going to agree, However after more thought I don't. The capital injections are in the form of loans, correct? If not spent then the Fed/Treasury can call the funds back and deploy themselves. If treated as income on their balance sheets then wouldn't that money be taxable therefore increasing tax receipts/revenue? Additionally the amount of money is an estimated 700 bil, plus the AIG money, plus the TARP money, I don't know the exact figure off hand but of it all only 250 bil injected directly into banks. This leaves the Treas/Fed with the rest to deploy, also they went to approximately ten banks for a reason. Someone is going to want the market share to lend and they will lend. Once they begin lending even if the other banks hold, they will just borrow more from other banks internationally, remember 250bil even split 10 ways would give one of the banks 25bil. With fractional reserve banking and the ratio being about 9:1 that bank would be able to lend out 225 bil, more than enough. This is strategic, INFLATION OR BUST.
Bernanke's goal is inflation without excessive price increases and without excessive unemployment. The Fed's only tool is money supply, either increasing or decreasing the funds available to the market.
If everything goes according to Federal Reserve plans, money supply will increase until consumers feel the pain of rising prices, then the money supply with slow and prices will stabilize.
The paramount problems with this attempt to control prices and money is that there is always a lag between cause and effect, and there is always more variables than can be figured into the calculation. After all, in any economy, everything is a variable -- there are no invariables, because humans are behind every direct decision, and every human is an independent variable!!
Any attempt to use if/then equations or any other simplistic, algebraic-based decision making into such a complex set of variables as a global economy is doomed from the start, the timing is merely a question of coincidence. The judgment or guesswork of the Federal Reserve is bound to fail given the complexity of the problem; the only question is, when will the error in monetary judgment be made undeniably manifest.
The Federal Reserve plans to stop the easy flow of money exactly when the possibility of deflation disappears and when the possibility of hyperinflation reappears. Based on their best calculations, given the nearly infinite number of variables they have to work with, they plan to make a centralized decision that will preserve and protect the entire global monetary system. Does any one else believe the Federal Reserve's goal might be a mission in arrogance?
To pay for the bailout, and the subsequent bailouts that we will be told are necessary, and the economic stimulus package that the Democrats won't be able to say "No" to, will cost money. We don't have any money, so we will need to have the Federal Reserve print that money. THAT WILL CAUSE INFLATION.
But Ron Paul is right about the economy. We need to cut spending, rein in the Federal Reserve, cut taxes, and legalize competing currencies. It seems like you can't really disprove what Ron Paul is saying. You just want to be able to brag that you proved him wrong on something. Maybe next time.
Posted By: Jake, the champion of the constitution
Date: 2008-10-22 03:11:28
Dear Jeff B -
You wrote "you can't really disprove what Ron Paul is saying. You just want to be able to brag that you proved him wrong on something."
Well, what is the harm in trying? Do you just want your news and ideas spoonfed to you? No, you missed my tone, this article is more or less playing devil's advocate for me and to see what a few others think of it. If I wrote another rant about how the world is going to end in a hyperinflammatory fireball that wouldn't be as interesting to think about, now would it? :)
I am not bragging in the article at all. However, in my last article I did more or less brag I finished a multi-country ultramarathon but there was freedom-related reason for it. Thanks for writing back!
1) It's the overall money supply that drives prices, so it really doesn't matter if the banks hold on to dollars. Besides, if the Fed isn't happy with the money supply it would just create more dollars. 2) Inflation and Recession are not mutually exclusive phenomena. The "stagflation" of the 70s proved that. We may, and it seems likely given the current situation, end up with inflation and high unemployment simultaneously. 3) Currency backed up by a commodity or commodities with real value is the best solution for our current predicament. Gold prices (if we should adopt a gold standard) may rise or fall depending on demand, but 70s style inflation is not possible when every dollar must be legally redeemable in a set amount of gold. So we would still have the downturn, because banks holding bad real estate, investors holding bad financial products associated with the housing market (derivatives), and all the industries that fed off of home equity dollars must liquidate losses. This isn't going to be pretty.
Fed sends a check to these banks, of the 10 banks if all of them hold on to this newly created money. The actual supply of money will be down?
Now what about demand, the fact is there is no demand in the market. the only deflation i see is consumer driven demand. While the banks may or may not loan in the end it won't matter.
Here is why.
Missing piece 1.) While the fed has always been in the game of increasing/decreasing the supply of money. So have the banks, if fractional reserve banking is truly what they are doing then the banks have more say into the increase/decrease in the money supply. This is where you may see the deflation...however, because the banks are not lending on the reserves they hold there is no new money. The fed in turn must do it instead. Loaning to the banks and the other businesses. To continue the Inflationary trend. The bailout allows Paulson to do this with ease
2.) Demand. As demand goes down, (because people are getting laid off.. etc.) typically prices would go down, but because of the inflationary market, prices will actually rise at this point. However, as the value of the dollar continues to spiral downward there will eventually be a leveled off inflation where it rises at a rate and stays at that rate.
3.) the unknown. This includes the problem with not knowing which millionaire is going to invest in a new house/car/boat etc. This is where everything could go good or bad. Those with the money now have even more of an influence than before. Because as they spend it and it gets absorbed back into the system, it helps keep the inflationary trend on track. The more they spend the more it continues. However, this is where backscratching begins and ends.
Those who have benefitted the most from this bailout will end up helping others that wish to stay afloat. And perpetuate the trend in only the circles they keep.
To wrap all this up in a bow, the bailout not only providing an avenue to socialization also provided the means in which to create a pseudo society-market almost untouched by most of the goings on in the market. Those of us below that line will suffer for their expenses; and it gets worse as they continue to spend and invest into eachother to get stronger. This massive movement of wealth from us,(in the form of national debt) to the banks, investment companies and the like (if you read the text of the bill there is a way to get paulson to pay off your car loan if he sees fit). This will cause a segregation in the market where the american people will have to beg borrow and steal to pay down debt, and where those above the bailout line dont have much to worry about as we shrink down into poverty and ask, neigh demand socialization.
So two markets emerge one above the bailout line (those who qualify to take part) and those who dont.
The middle class are now those with wealth that neither needed/wanted the bailout but still have money either way. These are the people who will suffer next as the elite in the system try to get the either in the cycle with them or on the bottom with us.
Alright I apologize if that is hard to follow number 3 is out of order with the rest of it and should read.
3.) the unknown. This includes the problem with not knowing which millionaire is going to invest in a new house/car/boat etc. This is where everything could go good or bad. Those with the money now have even more of an influence than before. Because as they spend it and it gets absorbed back into the system, (either us or with them) it helps keep the inflationary trend on track. The more they spend the more it continues. However, this is where backscratching begins and ends. If they keep it in the upper segment of the economy, it helps the bankers and insurance companies, Inevitably helping them stay in power. Or they push it into the lower market where we reside, buying items from local businesses to help smaller businesses keep up.
You're correct that, if more money is hoarded than printed, the result will be deflation. However, I don't see that happening. One reason is the "bailout culture" or "bailout mentality" that Bob Barr (and others) have been going on about on the campaign trail. Once one allows one bailout, the political pressure grows to bail out everyone; already private firms (like the auto companies) and even states (like California) are standing in line for their bailouts. And some, if not most, of those recipients will be spending the windfall rather than hoarding it. So I don't see deflation as a probable result.
Interesting thesis, though; I'm glad to see you thinking outside the box. In these times, one has to.
I like you, Jake, you have real talent. What you're suggesting is tantamount to leaving a crackhead in charge of tons of the stuff and expecting him not to burn it. Sorry buddy, ain't a gonna happen. Certainly, failing to release extra money into the economy might belay the resultant general price increases but we both know that the banksters cannot wait to unleash all that cash on us innocents. Another thought is that prices may start to rise simply on the expectation of currency inflation even before it is released. The mere existence of extra money at the banks' disposal may be enough to start the ball rolling.
Personally, I think there will be deflation then massive inflation.
However, whether the market is manipulated into one or the other, the question remains what created the Constitutional ability of this entity to IMPACT our monetary system like this?
Ron Paul is entirely right. Support his HR2755 to abolish the fed and return our money to our uses.
By saying hyperinflation and deflation are opposite, you claim that they are mutually exclusive. I think you are on the right track that we are and will experience deflationary pressures. However, I think it's quite possible to have both inflation and deflation in the same environment. The printing of money undoubtably causes inflation, which makes goods less affordable, however these goods (e.g. gold, oil. I'm not sure about bread) are also in less demand because people have less disposable income due to their investments (e.g. houses) being suddenly worth less (popping of housing bubble) and due to the rising unemployment rate. The critical point in this model is that the inflation rate remains higher than the deflation rate. I think this is the only way to account for unaffordability of goods (à la Weimar Republic) that Ron Paul, Peter Schiff and colleagues have been predicting coupled with the rising strength of the dollar and the falling prices of gold, silver and oil that we have experienced for the past 4 weeks.
I have been following Peter Schiff after his apearance on Glen Beck. One aspect left out of this deflation theory is all of the dollars that are outside of the country. Your theory ignores this vast some of currency and debt which used to be counted in M3. When inflation comes it will be from the collapse in value of all of this outside the borders "US money." That's where your analysis falls down.
Posted By: Brain F. Arting
Date: 2008-10-22 12:05:14
Let me start off by apologizing as I don’t know the issue of the bailout 100%, so most of this is me asking a question or clarification not making a “I know it all” statement.I believe that whether the banks decide to hold on to the money, that the banks have the money already affect the money supply. If the banks receive money from Uncle Sam, I believe that they have to report the increase of “asset” on their books. This increase would be reported on their balance sheet. Wouldn’t the increase of assets affect the bank’s stock outlook, and eventually provide a rise in its stock price? If so, there’s the possibility that someone would sell any holdings that they may have in the bank. So wouldn’t the profit in the sale of that banks stock already be a resulting effect of the increase of cash?Secondly, I believe that banks are in the business of making a profit. I don’t believe that the banks are in league with each other, if so, then I could see them all holding on to the cash. I believe that they want to employ the cash as soon as is “reasonable” to that it can start working for them again. I believe that what has changed is their standard of “reasonable” and are being cautious as to when and who to provide loans to. Otherwise, it is my opinion that they want to use it… just more cautiously and that cautious criteria is yet being assessed.Again, I’m just brain farting… not claming to be anything more than someone bored IRL and interested in what you wrote.
Posted By: Max Andronichuk (Ukrainian Libertarian living in L
Date: 2008-10-22 14:13:57
The argument is not bad, but rests on a big assumption....
That the banks will just "hold on" to the money.
What we forget is that the Banking system does not work by just having the money we deposit sit there in a vault doing nothing... The money that has been injected into banks is not going to be just kept in a big room, it will be lent out in the forms of Mortgages to prop up the Housing Market.. it will be used to help banks write off Bad Debts...
Money circulates, the reason banks wont burry it underground for 100 years is because the second they receive it, they know it is losing value, so they need to put it somewhere (a fund, mortgages, investment, assets, commodities...) so that it starts growing more than or atleast at the same rate as inflation. If I gave you $100 to replace $110 you lost, would you just hold that $100 for 10 years while inflation eats away at it? Now times that $100 by 7 million and the picture becomes clearer...
HOWEVER, the thing that I am thinking about at the moment... is will the Dollar collapse?
Seeing as almost every nation in the World has huge reserves of US Dollars....will one of them panic and start dumping or will they all collaborate to buy up all the extra notes the Fed prints off? Let's see who starts sweating first. Yes the Chinese have Billions in reserves...but everytime the fed prints another Billion....the value of the reserve falls..
So will ths US be able to maintain their currency or will human nature and panic prove that fiat currencies are very risky and are based on an unstable foundation...
I believe that you cannot create "value" or "wealth" out of thin air and not have any consequences.
Inflation or deflation? My answer is I don't know. I bounced that question off Michael Badnarik on his talk show last night. He seemed uncertain too, although he thought both.
One definition of deflation is falling prices associated with a falling money supply. So when we see falling prices we have to ask why are they falling. Falling PC prices resulting from improved manufacturing processes is not deflation. But what about falling house prices? Are they falling because people don't have the money to buy them and/or can't get a mortgage to buy them? If so, I think that would be deflation. How about stocks, gold, silver, oil and gasoline? Well there may be less demand for them, but why?
But regardless of whether we call it deflation or falling prices, it would be nice to know which way we're headed; up or down. If we expect inflation and higher prices then precious metals and perhaps certain stocks would be a good thing to buy. If we expect lower prices then cash is the best thing to hold. But be careful of where that cash is. Money market funds are not usually FDIC insured and many of them are invested in sub-prime mortgages up to the eyeballs. Even some bank accounts are not FDIC insured and those could go belly up just as they did in the depression.
Short term it can be anything. Long term, flooding the economy with all this money can only lead to inflation.
The banks might hold onto the cash, but they will have to pay off their CDS obligations. What will these people do with the cash then? Probably put in into the banking system and when all ths wealth is transfered and banks feel comfortable, look out! They will flood the market with cheap credit again.
Banks will go out of business if they hold the cash. They only make a profit on the movement of money.
Thomas Jefferson and Ron Paul are both correct. Inflation first, then deflation. We're going to get both sides of the pendulum.
- -
"If the American people ever allow private banks to control the issue of their currency, first by inflation, then by deflation, the banks, and the corporations which grow up around them, will deprive the people of all property until their children wake up homeless on the continent their fathers conquered."
after further thinking, by letting it all go for free, it seems that it would be greatly unfair for the have nots who just so happened to not have any finances tied up in anything. we'd have to assume other peoples good fortune would prompt the fortunate to lend big hands in helping others
Basically, what we have been seeing is that the FED's actions are like putting 100 years worth of fiat currency into circulation within a years period.
During the vast majority of the 1800s, there was a strong deflationary environment when it came to prices of goods and services, yet the economic was growing at a steady pace, just contrary to what we would normally expect in such cases, but that was the general trend of that period.
Today, we have an economic deflationary pressure that is occurring under a highly inflationary monetary policy, the two are NOT CONTRADICTORY, nor are the mutually exclusive in presentation. You can have both in any combination with various other factors.
There are several instances of deflationary sectors within an inflationary monetary environment, this is not unusual as one might suppose. Just because there are deflationary sectors within an economy does not mean that there is not an inflationary trend that will manifest itself. If we only look narrowly at deflated pricing and sectors but ignore the overall massive inflationary push that is occurring at the moment then we would naturally come to the conclusion that we are heading for a major deflationary event, that may not be the case at all. That inflationary push will present itself in the economy, there is absolutely no way to avoid the stream of massive inflation that is about to occur throughout the economic system. The FED/Treasury has already pumped massive amounts of both credit liquidity and money into circulation this year and is continuing to pump like there is no tomorrow.
There is a huge danger looming on the horizon and that is that the FED is not only involved in massive bailouts, but is creating huge amounts of money at this moment to prop-up prices, that is, after all, one of their "prime directives". They recognize the exactly same thing that you do, that we all do, and that is that during this period the natural inclination of a down-turning economy is deflationary in various sectors, thus they have shifted their "printing" gears into overdrive as a deflationary block. So, the problem with that is when so much "absolute-money" is being placed into circulation, particularly in a log-jammed economy such as this, the danger for hyper-inflation occurs when that log-jam breaks free. A deflationary depression would be bad for everyone concerned, but it is nothing compared to a hyperinflationary depression that will destory absolutely everything economically and socially. A hyperinflationary event would effectively end not only the FED, but our society as we know it. We could survive a deflationary depression, but not a hyperinflationary one since the complete monetary structure and economy is destoryed in the process.
We are seeing the natural occurrances of deflationary pressures in a down-turn of this type, the difference is in the degree that the FED and other central banks are responding and the manner of their response.
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