John Maynard Keynes may be the most influential economists of the 20th century. In A.D. 1919, in his book The Economic Consequences of Peace, Keynes wrote:
“Lenin is said to have declared that the best way to destroy the Capitalist System was to debauch the currency.”
By “debauch,” Keynes referred to the process of inflation whereby a currency subtly loses purchasing power and becomes less valuable.
“By a continuing process of inflation, government can confiscate, secretly and unobserved, an important part of the wealth of their citizens. By this method they not only confiscate, but they confiscate arbitrarily; and while the process impoverishes many, it actually enriches some. – As the inflation proceeds and the real value of the currency fluctuates wildly from month to month, all permanent relations between debtors and creditors, which form the ultimate foundation of capitalism, become so utterly disordered as to be almost meaningless; and the process of wealth-getting degenerates into a gamble and a lottery.
By “confiscate,” Keynes meant “rob”.
By “wealth of their citizens,” Keynes meant “savings”.
By “gamble and a lottery,” Keynes described the process of speculation replacing investment. He also implied a change in a society’s moral values where wealth is acquired by means of lies and hustle rather than production and earnings.
“Lenin was certainly right. There is no subtler, no surer means of overturning the existing basis of society than to debauch the currency. The process engages all the hidden forces of economic law on the side of destruction, and does it in a manner which not one man in a million is able to diagnose.”
• The federal government hasn’t let the dollar deflate (gain value) since the end of WWII—except on a temporary basis. The Federal Reserve claims that its fundamental job is to fight inflation, but the history of the fiat dollar is one of mandated inflation. In fact, the Fed’s primary job has been to cause moderate inflation (1% to 3%) in order to avoid its one great fear: deflation.
As evidence, consider the prices of gold and silver since A.D. 1968 (when paper dollars stopped being redeemed one-for-one for silver dollars) and A.D. 1971 (when foreign-held paper dollars stopped being redeemed at $35 to one ounce of gold). Today, one ounce of silver costs $32 and one ounce of gold will cost $1,700. Do the math and you’ll see that in just the last 40 years or so—as measured against the prices of both gold and silver—the fiat dollar has lost 97% of its purchasing power.
The magnitude and duration of post-WWII inflation isn’t accidental or evidence that inflation is an adversary too strong for the Federal Reserve to vanquish. Inflation is the government’s objective.
Why? Primarily, to allow the federal government—the world’s biggest debtor—to default on its debts, rob its creditors but still avoid the stigma of open bankruptcy.
OK—let’s suppose that Keynes was right when he observed that,
“There is no subtler, no surer means of overturning the existing basis of society than to debauch [inflate] the currency. The process engages all the hidden forces of economic law on the side of destruction, and does it in a manner which not one man in a million is able to diagnose.”
By “existing basis of society,” I believe Keynes meant the society’s fundamental values and dedication to production rather than consumption. Inflation attacks the nation’s fundamental and historic values.
If Keynes was right in arguing that inflation precipitates national destruction, what can we infer about the true nature and motives of a Federal Reserve and national government whose laws and policies persistently promote inflation?
• Given that the feds have promoted inflation for over 40 years, what are the odds that they’ll continue to do so? Very high.
The national government must repudiate most of the national debt because the debt is too great to ever be repaid. What can’t be paid, won’t be paid. Creditors must therefore be robbed—or, as Keynes said, their wealth (savings) will be “confiscated”. That’s not an accident or unintended consequence. Robbing creditors is what government does.
There are two ways for government to rob its creditors:
1) By openly repudiating the debt and admitting the government is bankrupt. For example, government might simply say, “Sorry, we’re broke and can’t pay So-So Security to retirees this year.” Unfortunately, overt repudiation of debt would likely spark riots and social upheaval.
2) By surreptitiously inflating the currency and thereby sustaining the illusion that the government is solvent rather than bankrupt. For example, government may have promised a retiree that he’d receive $1,200 a month in So-So Security. But if government could cause 50% inflation over a period of years, the purchasing power—the real value and cost of that $1,200—might be reduced to $800.
Inflation may not repudiate all of the debt, but it can reduce the debt substantially without most creditors realizing that they’re being robbed. (Remember? “not one man in a million is able to diagnose “ the robbery called inflation?) Result? Unable to diagnose the cause of their distress, the public is less likely to riot or revolt.
If government admits that it’s bankrupt (or at least insolvent), government loses its legal authority. Government is loath to admit it’s bankrupt and without authority. Therefore, gov-co will endeavor to escape the existing national debt by means of inflation.
• People complain that The Powers That Be (TPTB) have been suppressing the prices of gold and silver.
I believe the claims of market manipulation are generally, but not precisely, correct. Except for the past 12 months and A.D. 2008 (another presidential election year), the price of gold has risen about 20% every year since A.D. 2000. Thus, it’s hard to reconcile the argument that TPTB have suppressed the price of gold with the fact that gold has risen from $312/ounce on September 1st, A.D. 2002 to nearly $1,700 today. Over the past decade—even including the fall in gold prices over the past year—the price of gold has increased by an average of 18% per year.
How can anyone square allegations that TPTB have “suppressed” the price of gold when it’s risen by an average of 18% annually for a decade?
I square it thus: The “Powers” want inflation. Although exceptions may be made for presidential election years (A.D. 2008 and 2012), TPTB have allowed the price of gold to rise an average of 18% per year for the past decade. But they’ve also prevented the price of gold from rising more than 18% per year (on average) because they don’t want to create irrefutable evidence that inflation is skyrocketing.
In other words, without price manipulation, the price of gold would probably have risen significantly more than 18% per year (on average) over the past decade. Left to the free (un-manipulated) market, the price of gold might’ve increased by an average of 25% per year over the past decade. Or maybe 30% or even 50%—who knows?
The “Powers” suppressed the price rise to “only” 18%. But they didn’t suppress it to 0% because they want a rate of inflation that will negate some of the national debt, but not incite the voters to revolt. The “Powers” don’t want to allow the price of gold to skyrocket since doing so might destroy whatever confidence remains in the US dollar. But they do want the price of gold to increase by 18% per year in order to help repudiate much of the national debt.
• I expect that after this year’s election, the Powers will allow the price of gold to rise another 20% (maybe more) next year.
But, predictions aside, I’m convinced that even the Powers don’t want the price of gold to fall significantly and stay at some low price because the gov-co can’t survive deflation.
A significant fall in prices (deflation) could destroy major debtors.
Consider the “economic shock” of A.D. 2008-2009. That “shock” nearly collapsed the US and even global economies.
What precipitated that “shock” and the debacles at Lehman Bros. and Bear Stearns?
A: A dramatic fall in home prices (deflation).
Moderate deflation favors creditors but can kill debtors. When the prices of homes fell after A.D. 2008, many debtors (mortgagors) simply abandoned their homes and repudiated their debts to the banks. Faced with significant deflation, I expect government to exhibit no more moral obligation to repay the national debt than home-buyers exhibited when faced with falling home prices and mortgage deflation.
Government can’t survive and won’t allow long-term deflation.
• Consider: we have a debt-based monetary system.
The federal government is the world’s biggest debtor.
Does it make sense to believe that the “system” doesn’t favor and even depend on inflation for its survival?
Instead, it makes perfect sense that the government-debtor would enact laws and policies to allow it to inflate the currency and thereby pay off its debts with “cheaper dollars” and “legally” rob its creditors.
• Who are the government’s creditors?
A: Anyone who’s accepted and relied on government’s promises.
Obviously, anyone who loaned currency to the government in return for one of government’s bonds (a promise to repay), is one of government’s creditors.
But less obviously, so is everyone else who’s accepted and relied on government’s promises to provide welfare, subsidies, health care, pensions or even national defense. These promises are every bit as much debts owed by the government as the debts owed for borrowed currency.
When the national debt is calculated based only on the monetary debts our government owes, the result is $16 trillion. When the national debt is calculated based on all the monetary debts plus all of the services, benefits and entitlements that government has promised to provide as “unfunded liabilities,” the national debt rises to $80 trillion—maybe more. Most of those “promises to pay” are likely to be repudiated in whole or in part by a government that’s determined to rob its creditors.
• Government robs its creditors by means of inflation because politicians know:
1) It’s easier to be elected in the first place if politicians make exorbitant promises—even if they know those promise can’t be kept; and,
2) It’s easier to stay elected if their original promises are repudiated by the subtle means of inflation rather than open repudiation of the debts/promises.
Again, Keynes warned that inflation engages processes of national destruction that “not one man in a million is able to diagnose”. If any political program costs politicians just one vote out of every million, that program won’t be abandoned simply because it’s irrational or unaffordable.
• Do the “Powers” dream of pushing the price of gold down to $1,300 an ounce? Do they plan to permanently suppress the price of gold to $1,000 an ounce? Absolutely not.
The last thing in the world that the Federal Reserve and national government want is deflation. They hate, despise and fear deflation.
Do you suppose the government wants the dollar to gain in value and purchasing power? Do you think the government wants to see retirees’ pensions and So-So Security payment increase in value and thereby increase the true national debt? Absolutely not.
Deflation favors creditors—and punishes debtors—since debts are repaid with “more valuable” dollars.
Inflation, on the other hand, favors debtors since they can repay their debts with “cheaper” dollars.
Again, as the biggest debtor in the world, does government favor inflation or deflation?
The answer’s obvious–particularly since persistent and significant deflation could kill our overly-indebted government.
• The conclusion seems inescapable that government and the “Powers” want inflation and will not allow deflation—at least not for long.
Yes, in A.D. 2008 and again in A.D. 2012, the price of gold dropped significantly. Those drops are evidence of deflation and tend to refute my argument that the government despises and will not allow deflation.
How do I explain that apparent contradiction? I suspect that deflation in the price of gold was at least allowed and perhaps even caused in A.D. 2008 and A.D. 2012 because those were presidential election years.
I.e., less than a year ago, the price of gasoline was over $4/gallon and was expected to soon exceed $5. People (read, “voters”) were anxious and angry. Angry voters don’t reelect incumbents. If the price of gasoline was over $5/gallon right now, do you think Obama could be reelected? How many incumbent representatives and senators do you suppose would be voted out of office?
Fortunately (for Obama and other incumbents), the price of gold fell from $1,900 to $1,700 (11%) in the past 12 months. As the price of gold fell, so did the prices of crude oil and therefore gasoline and diesel fuel. When the prices of gas and diesel fell, so did the pressure to raise the prices of food.
Result? Without high inflation rising prices of food and fuel, voters are relatively happy and less inclined to riot and attack incumbents with pitchforks.
Although it’s pure conjecture, I believe the dreaded deflation was allowed and even caused by the Powers in A.D. 2008 and A.D. 2012 in order to favor reelection of incumbents. If my conjecture is roughly correct, once we get past the November election, we should see a shift back to inflation that should last until the next presidential election year in A.D. 2016. I.e., we should see the prices of gold, crude, gas and food rise by 10% to 20% annually in A.D. 2013, 2014 and 2015.
Why? Because big government is based on big promises (debts) that are “too big to keep”. Big government can’t survive deflation (an increase in the real cost of promises). There may be political exigencies that allow occasional episodes of deflation, but long-term, big government must inflate or die.
• Many economic gurus predict that the Federal Reserve will soon implement QE3 and thereby cause significant inflation. Others predict that we won’t go into inflation but are, instead, destined for deflation.
I understand and respect the case for predominate deflation. Whenever you go into an economic depression, “cash is king” and the currency almost always deflates (increases in value).
But I will bet that in the event of a real economic depression, any long-term tendency to deflation will be strenuously resisted by government even if that resistance requires the abandonment, destruction and replacement of the fiat dollar.
I’m convinced that the Powers will kill the fiat dollar before they’ll allow long-term deflation. It’s not a political choice or a fiscal choice. It’s a matter of survival. Big government must inflate or die. Government may be murderous, but it’s not suicidal. Gov-co won’t choose to die. It will choose to inflate.
• The price of gold is going up, in part, because government can’t survive deflation and must therefore cause inflation. But who believes in inflation without a rising price for gold? Gold may not go up 30%, 40% or 50% per year. But you can expect it to rise about 20% per year from 2013 to 2015.
We may yet see an “inflationary depression” (stagflation) wherein the economy is generally depressed, but dollar nevertheless continues to be inflated. But we will not see significant, prolonged monetary deflation so long as the government has the power to prevent it.
If we do see significant monetary deflation, it will be evidence that the government is dying.